PFE Preview: Deep Value Dose

Pfizer (PFE - commentary - Cramer's Take) is a mature drug company, and its heyday of 12% to 15% earnings growth based on one or two key drugs such as Viagra is probably over. Similar to peers such as America's Merck (MRK - commentary - Cramer's Take) and Eli Lilly (LLY - commentary - Cramer's Take) and Britain's GlaxoSmithKline (GSK - commentary - Cramer's Take), it is basically a manager of a large portfolio of medications of varying sizes and profitability. The sum total is quite impressive: Consensus earnings estimates are for 55 cents a share on $12 billion of sales in the third quarter and $2.15 a share on $48 billion of sales for all of 2008.

Individual drugs (as opposed to drug companies as a whole) are subject to "royalty trust" pressures, declining sales and profit bases. Key concerns for Pfizer in this regard are Lipitor, a cardiovascular drug, and Zoloft, an antidepressant. The company's lack of profit progress in recent years has been due to fall-offs in sales of these drugs, mostly offset by cost-cutting and the introduction of smaller new drugs in areas such as schizophrenia, Alzheimer's disease and smoking cessation.

It's possible, though not assured, that Pfizer will get lucky with another Viagra, thereby breaking out of the hum-drum holding pattern of the past few years. If so, the stock would likely skyrocket off its current low base.

Pfizer stock is most attractive as a total return rather than a capital gains vehicle. The yield alone offers the 8% total return that I believe to be available elsewhere for other stocks. So any capital gains, which is likely given the stock's low valuation of less than 8 times 2008 earnings, would be icing on the cake.

In terms of quality, Pfizer is one of the few industrial companies with a split AAA/AA rating or better from the agencies, with the others being Berkshire Hathaway (BRK.A - commentary - Cramer's Take), Exxon Mobil (XOM - commentary - Cramer's Take), Johnson & Johnson (JNJ - commentary - Cramer's Take) and General Electric (GE - commentary - Cramer's Take). Because of its deep value and resulting attractiveness on a risk-adjusted basis, it is one of two Dow 30 industrial stocks that I own, the other being Alcoa (AA - commentary - Cramer's Take).

On the call, I will be listening for a discussion of the main earnings drivers, the decline of Lipitor and Zoloft, the emergence of other drugs and the effect of cost-cutting measures.

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At the time of publication, Au was long Pfizer, Berkshire Hathaway and Alcoa, although holdings can change at any time.

Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Au is the author of A Modern Approach to Graham and Dodd Investing. Au appreciates your feedback; click here to send him an email.