Should I Do It: Wyeth Not?

Wyeth currently enjoys several advantages over its peers.
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Wyeth (WYE) may not be the household name that Eli Lilly (LLY) - Get Report, Bristol-Myers (BMY) - Get Report and Schering-Plough (SGP) are in the pharmaceutical sector, but this $69 billion company dwarfs them in terms of market capitalization.

Another advantage that Wyeth enjoys over its peers is a large window of patent protection for its top-selling branded prescription drugs like antidepressant Effexor, vaccine Prevnar and the Enbrel arthritis drug. In addition, the company's consumer-healthcare segment (14% of total revenue in 2005) produces brands like Advil, Centrum, Robitussin and ChapStick.

Wyeth is scheduled to deliver third-quarter results Oct. 19. The consensus analyst estimate is for the company to earn 80 cents a share, down a penny from the previous year, on $5.04 billion of revenue. The company has exceeded bottom-line expectations four of the past five quarters.

Ahead of this number, Wyeth shares closed Tuesday at $51.65, up 12.1% year-to-date, trading at their highest level in four years.

With that in mind, I'm here to answer investors' questions: Should I do it? Has Wyeth already enjoyed a solid run, or is this drugmaker just the remedy to boost your returns?

Wyeth (formerly called American Home Products) held an analyst meeting Oct. 5, which was its first since June 2004. The focus of the gathering was the drugmaker's pipeline, which caused Merrill Lynch analyst David Risinger to upgrade the stock the following day, from neutral to buy.

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According to a research note by Risinger, "Wyeth should generate the most product approvals in 2007 (with six) among U.S. Pharma." Among the company's drugs awaiting Food and Drug Administration (FDA) approval next year are products that treat everything from depression and cancer to osteoporosis and birth control.

The analyst is also looking for 9% to 12% annual earnings growth through 2009, as the company's operating margin is expected to grow more than 400 basis points, from 26.8% currently.

For 2006 as a whole, the consensus analyst estimate is for Wyeth to earn $3.15 a share, up 8% year-over-year. This would mark the ninth time in the past 10 years the company has delivered annual earnings growth. At current levels, the company trades at 16.3 times expected full-year earnings. This is a 23% discount to Wyeth's average historical valuation and 17% below its peer group, according to Capital IQ.

The company also offers investors a 26-cent quarterly dividend (2% yield), which was just raised Sept. 28 for the second straight year. Investors at the close of trading Nov. 8 will qualify for the Dec. 1 payment.

Taking everything into consideration, the answer to "Should I do it?" is yes. Wyeth remains attractive to consider purchasing at current levels. The stock continues to trade at a discount to its peers, even though it has the best near-term growth potential in the pharmaceutical industry.

David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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