Pfizer: Value Investors Saved By Margin Of Safety

Rule no.1: if a company is doing fine, look at the balance sheet.
Rule no.2: if a company is in trouble, see Rule no.1.
(Value Investor Blog)


Pfizer, the world leading drug maker has find a place in many of the major value managers portfolios. According to GuruFocus website here is a table of the most famous investors involved :

Ticker	Guru Name	Portfolio Date*	Current Shares	% of Total Assets	Change from Last Holdings
PFE	Arnold Van Den Berg (CM Advisors Fund)	2006-09-30	5,871,000	6.56%	-0.03%
PFE	Tweedy Browne	2006-09-30	7,454,663	6.49%	3.43%
PFE	Dodge & Cox	2006-09-30	27,392,094	3.18%	-78.54%
PFE	Ronald Muhlenkamp	2006-09-30	3,187,325	2.72%	0.69%
PFE	David Dreman	2006-09-30	16,426,784	2.66%	12.09%
PFE	Charles Brandes	2006-09-30	45,528,520	2.27%	-17%
PFE	Edward Owens	2006-09-30	17,611,570	2%	-37.13%
PFE	Michael Price	2006-09-30	335,000	1.67%	0%
PFE	Brian Rogers	2006-09-30	9,964,000	1.29%	-0.36%
PFE	George Soros	2006-09-30	296,500	0.48%	42%
PFE	Charles de Vaulx	2006-09-30	69,568	0.02%	-41.4%
PFE	Ruane Cunniff	2006-09-30	88,413	0.02%	-12%
PFE	Martin Whitman	2006-07-31	2,000,000	0.87%	0%
PFE	Bill Miller	2006-06-30	12,200,000	1.53%	6.03%
PFE	George Soros	2006-06-30	208,800	0.73%	91%

Two main reasons convinced them (and us) to invest in Pfizer stock: historical low P/E multiples and a AAA graded balance sheet. The latter is most important for us. Pfizer has about $14 billion cash and short term investments and only 8 billion of short and long term debt. One of the strongest balance sheet in big pharma industry with a debt to equity ratio of 0.116.

Balance-sheet is almost always overlooked by stock analysts but same is paramount to protect your investments value even in case of disaster.

And the company faced a true disaster yesterday. Few days after an analyst meeting with a very positive tone on their drug pipeline, following an abnormal death statistics of some patients under clinical trial, Pfizer decided yesterday to stop trials of the anti-cholesterol drug torcetrapib.

This sudden and unexpected stop is a major drawback for the company future since torcetrapib was supposed to replace Pfizer best selling drug, Lipitor which patent expires in 2010. In the last twelve months Lipitor were amounting to about a quarter of all Pfizer sale which suddenly have barely no replacement within four years.

What would have happened to a more levered company ? An immediate crash of 20/30% would have been in the cards.

In the case of Pfizer the balance sheet strength freeze somehow the slide. Ample cash at disposal allow management to put a floor on stock quote by:
- increasing dividend (already at 3.40%);
- buying back shares;
- investing in drug pipeline developed by other companies.

In fact, despite abysmal news, stock is presently trading at $24.71, at "only" 11.30% less than yesterday close of $27.86.

So what to do with stock now ?

We sold our 50% position bought at $24.79 in December 2004 at 2.6% loss. Including dividend the investment has been barely positive.

According to Value Investor Blog the main danger is now that cash on hands will be used to buy missing pipeline at an hefty price either by purchasing drugs from other pharmaceuticals companies or by merger and acquisitions operations at unfavourable terms for current Pfizer shareholders.

We must admit however that sofar the new CEO, Jeffrey Kindler, impressed us in his first months of tenure. He is aggressively cutting costs to adapt Pfizer structure to stagnant revenues and he has expressed a strong commitment on dividend increase shares buyback.

If he will start to do right moves to solve the poor Pfizer research and development productivity using wisely cash in hands Pfizer can become an attractive investment again. If balance sheet remains strong, of course.

Investors already long the stock may keep in hands at least part of their position and wait for a turnaround in the company pipeline while cashing a juicy dividend. The risk is that Pfizer will become dead money for a few years.

According to us rock bottom of stock quote is limited $20-21 / share if no major negative event impact the company. At this level we would consider again buying the stock.


Disclosure: at the time of posting the author did not have a position in stock mentioned in the post.