I thought I’d start out the week by opening the mailbag for a recent reply to my posts about Pfizer’s research cutbacks. Here’s a perspective that you won’t get from me, at any rate:
You never surprise me of your uncanny ability to cast good news in a negative light.
Pfizer has been a bloated company following its acquisitions of Warner Lambert and Pharmacia & Upjohn. The company should have rationalized its workforce, including sales, marketing, and most especially R&D, a long time ago. So, hopefully, you are correct and there will be massive layoffs in R&D soon. Why should Pfizer spend all that money on high risk, low probability of success R&D projects?
Pfizer's belated cost-cutting will make it a leaner and more focused company. All the bad news is out there. Pfizer generates over $7 billion in free cash flow annually and pays a 7.4% dividend. Projected 2012 earnings per share (without Lipitor) are $2.05. So the stock is trading today fully discounting Lipitor and any possible good news the next 5 years. Does that really make sense to you?
So keep up your trash talk, so to speak. Pfizer today is money in the bank. The lower you can drive the stock price, the greater the future return. I just love folks like you who help to create great buying opportunities. Are you certain you're not buying Pfizer as you trash talk??
My response? Well, I can reply on several levels. I’m actually going to skip the outraged how-dare-you stuff about what a great thing it is that all those research people are losing their jobs, though. Let’s just take that as having been delivered, because I think a lot of good invective would just be wasted, anyway. We’ll keep this on a strictly business level, since my correspondent is nothing if not all business.
And from a business perspective, he has the beginning of a point. As many readers can attest, Pfizer’s in-house research productivity has not been good – at least, nowhere near as good as it’s had to be to sustain a company as huge as Pfizer. (There’s the problem, actually – as I’ve said before, the one thing that certainly doesn’t scale when a company gets larger is research productivity). So from my correspondent’s perspective, what do you do with the underperforming units of a company? You lop ‘em off, like pruning a shrub to get rid of unsightly branches.
Of course, one branch of a bush is pretty much like another as far as the survival of the whole plant goes, but cutting the R&D out of an R&D organization is not without risks. A Pfizer investor might be excused for forgetting that, since most of the company’s money has been made off the research of other labs, but the Lipitors do have to come from somewhere, eventually. And try as I might, I just can’t see Pfizer buying its way out of its current troubles. So, why should Pfizer spend its money on those "high risk, low probability of success R&D projects"? Because that's the only kind of R&D projects there are.
Now, as to whether all the bad news is already out there, I won't speculate. But I do know that if I had a dollar for every time someone proclaimed that all the bad news was already in some company's stock, I wouldn't have to work for a living. I invite my correspondent, though, to take a look at the company's history before sitting back and trusting those EPS numbers from the past. Let's take a trip down memory lane, back to the days of 2002, when the analysts said that it was going to earn about $1.60 per share for that year, $1.84 in 2003, and $2.14 per share in 2004. Watch it go! And after that, hey, who knew. . .well, reality intervened on those forecasts, but by 2005, now, double-digit growth was on the way.
Let's take a look at the company's actual financials and stock price over that period. It isn't inspiring. Click around on that chart: if you'd bought Pfizer ten years ago, you would have been flat with the index until early 2004, but since then it's been a disaster. Now, like my correspondent, you may be able to look at this and figure that hey, what could go wrong, and that all the bad news just has to be in by now, and that those earnings forecasts will finally start working out. Or. . .
So let's file that statement away for future reference: "Pfizer today is money in the bank". That's July of 2008, folks, and if you'd like to put some of your cash down on that statement, PFE is available during normal trading hours. I'll sit this one out.