PFE Sees Strength in Overseas Markets

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

Pfizer (PFE - commentary - Cramer's Take) reported adjusted third-quarter earnings of 62 cents a share on $12.2 billion of sales, beating Street estimates of 55 cents a share on $12.0 billion of sales. Nominal results of 34 cents a share differed from the above figure because of 28 cents a share of non-recurring charges for inventory adjustment and a legal settlement. We now believe that the company's adjusted 2008 earnings will fall in the $2.35 to $2.40 a share range, up from $2.20 to $2.25 earlier. This implies a growth rate in the high single digits.

Emerging markets is a bright spot for Pfizer. The company entered 126 new cities in China by midyear, several months ahead of schedule. Latin America is the fastest-growing region, especially Brazil, in spite of lack of patent protection. And sales in Europe are somewhat more robust than in the United States.

Generic drugs is another area of strength, where new and innovative selling models have often turned sales declines into advances. This is not the highest-margined business, but one where a company can move fastest with minimal FDA interference stateside.

Most important, sales of Lipitor, the cardiovascular drug, formerly on a downward trend, appear to have stabilized, as penetration overseas offset stateside declines. (Significant net drops are now taking place in less important drugs.) Elsewhere, the company reached a $900 million legal settlement regarding claims on two smaller cardiovascular drugs. Offsetting these problems, the number of drugs in Phase 3 FDA clinical trials has increased from 16 to 25 in the past year, within the company's year-end target range of 24 to 28, suggesting a pick-up in the pace of new introductions over the next two to three years.

Finally, Pfizer has achieved its full-year cost reduction goal of nearly $2 billion (based on constant currencies), a quarter ahead of schedule. The company hopes to continue with this process and parlay these savings into an operating margin in the mid to high 30s (up from low 30s), assuming a more favorable selling environment. Already a deep value stock, Pfizer is now beginning to post modest growth typical of the average industrial company. On this basis, a high yield, low debt levels and a low P/E multiple make the stock relatively attractive.

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At the time of publication, Au was long Pfizer, 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.