Deep Value in Pfizer

For Au's preview heading into the Pfizer conference call, please click here.

Pfizer (PFE - commentary - Trade Now) reported second-quarter earnings of 48 cents a share, or 41 cents after non-recurring costs related to the upcoming Wyeth (WYE - commentary - Trade Now)acquisition, modestly beating Street estimates, but revenue of $11.0 billion was a slight disappointment. Pfizer was actually pleased by the fact that all but its "established products" (i.e., the most mature ones that are off patent) generated revenue gains on a constant currency basis.

Adverse currency movements knocked $1.1 billion off the top line, however, and hurt the "middle lines." There has been $1.5 billion (annualized) of cost-cutting, but the cuts would have gone further absent rising costs denominated in foreign currency. Assuming no further hit from currency, Pfizer is actually increasing 2009 guidance for adjusted EPS to just over, rather than just under, $2.00 a share on $45 billion of sales.

The early stages of the integration with Wyeth are going smoothly. Pfizer is pleased to have learned important lessons from previous experiences in this regard, notably Warner Lambert, a decade ago. And, in fact, it was the former Warner Lambert that is providing a bridge to some of Wyeth's consumer-oriented businesses, such as nutritionals. These would not be among the combined company's largest or most strategic businesses, but Pfizer is happy to have them, if for no other reason to use in future combinations.

Key Wyeth executives are needed in the Pfizer organization, as earlier anticipated. While there are always some layoffs in a situation of this sort, management expects to proceed with a minimum of bloodletting.

Things are proceeding smoothly toward a merger outside of the two companies. There is no need for a bridge loan that had earlier been arranged; internally generated funds and term borrowings are sufficient to close the deal.

With shareholder approval having been received at a special meeting earlier this week, the merger is now only waiting for regulatory approval. The SEC has approved the related registration statements. Europe has demanded divestiture of certain animal health units that are now listed as discontinued operations. China may be the main holdup because it just passed an anti-monopoly law that has never been used in a deal of this size and scope.

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At the time of publication, Au was long PFE and WYE, 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, a book for times of economic uncertainty. Au appreciates your feedback; click here to send him an email.