Pfizer

Inc (Nyse: PFE)

Last Price: $28.68

7/18/2013

VIEW: HOLD
Pfizer Inc is one of the largest pharmaceutical companies in the world with a market cap of $202.6B and revenues of $57.6B. Pfizer segments its business across four main areas: Primary Care, Specialty & Oncology, Established Products & Emerging Markets, and Consumer Health and other smaller areas. The most part of its revenues come from its patented-protected drugs with top sellers including Lipitor (cholesterol-lowering), Lyrica (epilepsy and neuropathic pain), Viagra (impotence), and Celebrex (arthritis). With the recent acquisition of Wyeth, Pfizer expanded its portfolio of drugs and will be better prepared for the new challenges regarding patent-loss it is facing.

Sector: Healthcare Industry: Drug Manufacturers - Major

Highlights:
Even though Pfizer is one of the largest pharmaceuticals, enjoying a strong position to develop new drugs and benefiting from economies of scale, the company is on a key point with several challenges to solve. Pfizers portfolio of drugs is eroding with several patens expired or near expiring, meaning the company will now face the stronger competition coming from generic drugs. Its Lipiton patent expired in 2011 and Geodon, Celebrex and Detrol are expiring between 2012-2015.

To counterbalance the loss in revenues the company will have to develop new compounds through R&D efforts, acquire other pharmaceuticals with established revenues or promising research pipelines, and partner with other pharmaceuticals. The acquisition of Wyeth is a strong step to minimize patent- loss significance, to bring new important drugs inside the company (Prevnar and Enbrel), and help minimize operating costs. During the last ten years Pfizer spent an average of $8B in R&D but results have been relatively disappointing so far. This situation along with patent-losses is concerning investors. But the huge investment made so far and the more than $7B per year the company will continue to spend will sooner or later deliver results, which can boost the companys revenues. Currently Pfizer has some important drugs coming from its pipeline concerning the treatment of cancer, heart disease, and immunology.
STOCK PERFORMANCE 1M 3M YTD 1Y PFE -1.7 -7.1 14.4 21.4 JNJ 5.2 7.4 28.6 30.6 NVS -0.6 1.4 15.1 29.8 SPDR Health Care Select (XLV) 2.3 4.7 24.8 28.6 S&P 500 2.6 8.3 17.9 23.3 PFE Vs. Industry -4.0 -11.8 -10.5 -7.2

3Y 5Y 5Y CAGR 97.0 56.0 9.3 51.2 105.1 15.5 46.8 27.3 4.9 73.5 56.9 9.4 57.9 33.4 5.9 23.4 -0.9 -0.2

GROWTH AND BALANCE SHEET

The company reported earnings for its first quarter 2013 at $0.38 per share, and management lowered its 2013 guidance to a range of $2.14 - $2.24. Total revenue for the quarter decreased significantly YoY from $14.9 billion to $13.5 billion (9.3%) due to the loss of exclusivity of several key products, but through effective cost cutting the company was able to produce a similar operating income and deliver an EPS growth of 58.3%.

VALUATION
Pfizers P/E ratio stands at 20.2, which is above the industry average of 18.8 and also above both its 5- year average of 17.2 and S&P 500 average currently held at 16.6. With a P/E ratio above industry average, Pfizer should be expected to deliver an above average growth but analysts are estimating growth for the next 5 years at a rate of 1.5%. During the last 10 years Pfizer was able to deliver a healthy growth rate of 13.6%. Even though the company now faces difficult challenges, which will certainly push its growth rate down, management has been showing a strong ability to improve cost effectiveness through acquisitions. We believe the Wyeth acquisition and the next round of results from R&D will push the company growth rate much above the mean consensus of 1.5%. Our model uses a higher growth rate and forecasts a fair price of $60.04, which is 109.3% above the current price.

RECOMMENDATION for next 6 months: Our valuation model attributes a rating of 6.0 to Pfizer, and we initiate coverage with a HOLD rating. Even though the company is top positioned in terms of intrinsic value with our model attributing the stock a fair price of $60.04, the company fails to deliver the same enthusiasm when we look at its P/E ratio, insider ownership, current price level, total debt/equity and earnings consistency. Returns for the medium to long term may be substantial but the stock is currently out of favor and investors should wait. For options trading we suggest: Even though our rating gives the stock a HOLD rating, he distance from current price to fair price is large enough for us to recommend a long-term options trade. In our view, if buying an option on Pfizer, you should opt for longer maturities. Our suggestion goes to the following option: Call @30.00 with expiry date Jan 16, 2015

This call option is just slightly out-of-the-money and is currently selling at $1.79 with an implied volatility of 22.9%.
QUICK STATS Company Profile Market Data Stock Type Aggressive Growth Beta Last Close Sector Healthcare 1-Month Chg. Industry Drug Manufacturers - Major YTD Chg. Employees 91,500 YTD vs. S&P 500 Chg. Held by insiders 0.02% Key Data 52-Week High 52-Week Low Market Cap ($B) 202.6 % Below High Revenues ($B) 57.6 % Above Low Net Income ($B) 15.5 EPS 2.09 Technicals Dividend Yield 3.21% Valuation 50-Day Moving Average 200-Day Moving Average P/E 20.9 RSI (14) P/B 4.7 P/S 1.7 P/CF 17.5

0.69 28.68 -1.7% 14.4% -3.5% 31.15 23.07 -7.9% 24.3%

28.52 26.93 54.98

PFE Strengths Important patent-protected drugs Strong economies of scale Brand name Powerful sales force

 PFE Weakness
COMPETITION

Patent-expiring drugs will lead to increased competition Austerity measures in Europe put price pressure on an important market Expected cuts on R&D put pressure on future patents

Pfizer Inc Johnson & Johnson Novartis AG Merck & Co Inc Sanofi GlaxoSmithKline PLC Bayer AG Bristol-Myers Squibb Industry Average

Market Cap $M Net Income $M P/S P/B 202,647 15,526 3.7 2.5 253,164 10,440 3.7 3.8 179,081 9,656 3.1 2.7 145,333 6,023 3.2 2.7 139,991 4,162 3.0 1.9 128,204 4,218 3.2 12.7 91,501 2,566 1.7 3.5 73,109 1,468 4.6 5.4 18,493 23,158 3.3 3.2

P/E Op. Margin % Debt/Equity 20.2 20.1 0.4 24.4 25.1 0.2 18.5 21.0 0.2 24.5 16.0 0.3 25.4 17.6 0.2 20.2 28.5 2.6 27.1 9.6 --- 50.8 28.2 0.5 18.8 -1772.4 0.4

NEWS and CALENDAR

Headline Onyx Expects Takeover Interest Pfizer's Arthritis Drug Xeljanz Approved in Switzerland, Argentina, Kuwait, United Arab Emirates Lilly Designs New Study of Alzheimer's Drug Pfizer Gets Expanded European Approval for Prevenar 13 UK Health Watchdog Doesn't Recommend Novartis's Afinitor What Investors Were Researching in June UPDATE: Bristol-Myers, Pfizer: Anticlotting Drug Meets Study Goals Source DJ DJ DJ DJ DJ M* DJ Date/Time 07-16-13 | 12:45 PM EST 07-15-13 | 06:49 AM EST 07-12-13 | 11:35 AM EST 07-10-13 | 06:31 AM EST 07-07-13 | 07:15 PM EST 07-07-13 | 06:00 AM CST 07-01-13 | 01:54 PM EST

STOCK VALUATION MODEL

Instead of relying on fair value derived from a companys growth potential and free cash flows, our model uses a system of advanced mathematics to determine a stocks expected risk and return, taking into account many fundamental and technical aspects. The model rates stocks from 1 to 10, with 10 being the best. The final ranking value is the average taken from adding up all factors.

 Intrinsic Value of the Stock

FAIR VALUE ESTIMATE

Parameters EPS (ttm) Dividend Payout Ratio P/E Industry Average

CAPM Estimates Beta S&P 500 Av Return per year 10Y Treasury Bond Yield Cost of Equity

P/E Model 2.09 Forecasted Stock Price in 10 Years 70.9% EPS after the 10th year 18.80 Total Dividends Per Share Forecasted Stock Price in 10 Years + Dividends Estimated Price 0.69 9.77%
2.50% 7.52% Estimated Price Cash Flow Model

74.53 3.96 21.43 95.96 46.49

73.60

EPS Growth Estimates Hist. EPS Growth Analysts Est. 5Y Growth S&P Est. 5Y Growth EPS Growth (next 10y) EPS Growth (after)

13.6%
1.5% Fair Value 9.8% Current price 6.6% Distance To Fair Value 3.8% Stock Potential Valuation Model

$60.04 $28.68 $31.36 109.3%

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized. When the stock trades much above its fair value, investors may take the opportunity to sell the stock, reducing their exposure to an overvalued asset, and/or open a short position on it. Our fair value estimation model is the result of two independent models, one based on P/E and other based on cash flows. In order to determine fair value we use conservative estimates for growth based not only on analysts future expectations but also on past growth and expected market growth. To discount cash flows, we use the traditional CAPM model. We estimate Pfizers fair value at $60.04, which is 109.3% above the current $28.68 price. Financials We evaluate the whole financial position of the company by looking at its cash flows, balance sheet and income statement and then attribute it a rating. Pfizer has been able to generate strong cash flows from its operations making it relatively easily for the company to finance the introduction of any new drug without the need to raise equity or debt. Its

balance sheet has an adequate share of debt to equity and enough cash to cover all its current liabilities (cash ratio of 1.28). In terms of operations Pfizer has been able to keep a high operating margin (above 20%) due to cost cutting driven by the economies of scale deriving from its recent acquisitions. Sentiment Investors sentiment is gauged from authoritative financial community websites. Community sentiment on Pfizers prospects is relatively high and above analysts ratings. A strong history of consistency and a policy of high dividend payments are key for the rating of 8 we attribute on this section. Analysts ratings The model assigns a value according to analysts recommendation for the stock. Analysts have a positive long-term view on Pfizer even though most estimate a relatively low upside potential mostly due to low growth estimates. Earnings Consistency We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. Pfizers annual EPS for the last 5 years were 1.20, 1.23, 1.02, 1.27, 1.94 showing a growth rate around 10% and some consistency. If we look at the past ten years, the growth rate has been above 10% but some inconsistency is evident as there is some swings from year to year, preventing our model from assigning a high rating on this topic. Total Debt/Equity The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. Pfizer holds a debt-to-equity ratio of 0.4, which is in line with the industry average but still above its direct competition and our optimal number around 0.2. This deviation weights negatively on the rating.

EPS This Quarter VS Same Quarter Last Year The EPS growth for the current quarter relative to the same quarter a year earlier should be above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. Pfizers EPS growth for this quarter relative to the same quarter a year earlier was 58.3%, which leads to the assignment of a rating of 9. Management has shown strong skills to deliver high bottom line growth, even from weak top line results. Annual Earnings Growth This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. Pfizers annual earnings growth rate over the past ten years was around 13.6%, which is a relatively strong number for a company of its dimension. Current Price Level Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. Pfizer is trading a little off its 52-week high held at $31.15. In a scale bounded by its 52-week low and its 52-week high, the company is at a percentile of 69.4, which shows a relatively neutral environment. P/E Ratio The Price/Earnings (P/E) ratio must be at moderate levels for an investment to be worth the risk. Higher P/E stocks incur in the risk of mean reversion and are more volatile. Our model compares the current P/E with the industry average, the company 5-year average and the market P/E. The lower current P/E is relative to these three variables, the better. Pfizers current P/E ratio is 20.2, which is above its 5-year average of 17.2, above the industry average of 18.8, and also above the S&P 500 ratio of 16.6. At this level P/E is moderate to high justifying our rating of 4. Insider Ownership When there is strong insider ownership, which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own just 0.02% of Pfizers equity. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model. Technical Analysis The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value. Pfizer is trading above its 50-Day and 200-Day moving averages which is a bullish sign. RSI currently points to 54.98, showing the stock is not in an overbought state. At current levels, technical indicators are mainly bullish. Scorecard
SCORECARD COMPANY: NYSE: PFE

Intrinsic value of the stock Financials Sentiment Analyst ratings Earnings Consistency Total Debt/Equity Quarterly EPS change Annual Earnings Growth Current Price Level P/E Ratio Insider Ownership Technical Analysis

10 7 8 7 4 3 9 7 5 4 1 7

SCORE

6.0

RECOMMENDATION:

Hold