Pfizer: Analysts Bullish on Cheap Stock

Famed market strategist Jeremy Grantham expects U.S. blue-chip stocks to outperform the market. Pfizer is perhaps the most compelling of Dow components.

By Jake Lynch , Mar 18, 2010 5:00 AM EDT

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BOSTON (

TheStreet

) -- Stock-market strategist Jeremy Grantham at Boston-based investment firm GMO says "the outperformance of high-quality U.S. blue chips compared with the rest of U.S. stocks is nearly certain" in the long term.

Grantham achieved a following by avoiding bubbles, including technology stocks in the 1990s and credit markets in 2006. When he's bullish on an asset class, it's wise to emulate him.

Investors seeking to implement Grantham's strategy could purchase an exchange traded fund that tracks the mega-cap

Dow Jones Industrial Average

such as the

Dow SPDR

(DIA) - Get Report


Stockpickr: Who Owns Pfizer? David Dreman John Paulson George Soros

For stock-pickers, one component to investigate is biopharmaceutical giant

Pfizer

(PFE) - Get Report

. Although its growth and return on equity trail the industry averages, New York-based Pfizer is a grossly undervalued company.

Fourth-quarter profit nearly tripled to $767 million, or 10 cents a share, as revenue gained 34% to $17 billion. The gross margin narrowed from 93% to 81%, and the operating margin fell from 37% to 21%. Recent growth rates can be seen in the chart below.

Pfizer completed its acquisition of

Wyeth

in October, which boosted fourth-quarter revenue 27%, or $3.3 billion. International sales gained 28%, helped by a weaker dollar. Pfizer's international business accounts for 55% of total revenue. For the full year, specialty-care biopharmaceutical revenue soared 84% to $2.9 billion, supported by the addition of Wyeth's Enbrel and Prevnar drugs.

Wyeth's Prevnar 13, a drug used to protect children from bacterial infections such as meningitis and pneumonia, recently received Food and Drug Administration approval.

Standard & Poor's

equity research projects that sales will exceed $3.5 billion by 2012, whereas

Credit Suisse

forecasts $5 billion by 2014.

The drug will likely become Pfizer's top revenue-generator when cholesterol-control treatment Lipitor suffers patent expiry in 2011. Current testing on adult populations, if proven successful, will amplify Prevnar 13's revenue potential.

Pfizer holds $26 billion of cash, equating to a quick ratio of 1.1, and $49 billion of debt, translating to a debt-to-equity ratio of 0.5.

TheStreet's

stock model awards it a financial-strength score of 9.4 out of 10 for its durable balance sheet and consistent operating results. Profitability gauges, return on equity and return on assets, trail industry averages. Underperformance is partly attributable to size. Pfizer has a market value of $139 billion.

The stock has trailed major benchmarks during the past year, but offers an attractive 4.2% dividend yield, evident in the chart below.

Pfizer is undervalued based on all of our relative-valuation measures. Its stock is cheaper than those of pharmaceutical peers based on trailing earnings, projected earnings, book value, sales and cash flow. Its PEG ratio, a measure of value relative to expected long-term growth, of 0.2 reflects a 74% discount to the industry average. A PEG ratio below 1 signifies cheap shares. Here is a snapshot of how Pfizer's stock price stacks up.