Pfizer (PFEFree Pfizer Stock Report), the world's second-largest drugmaker and a Dow-30 component, has reported first-quarter earnings of $0.36 a share, versus $0.38 in the comparable period of 2013. The modest year-over-year dip in profits was largely attributable to continued generic erosion on several key medicines, partially offset by sharp cost cutting. Adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, came in at $0.57 a share, versus $0.51 in 2013. The adjusted figure exceeded consensus expectations, which called for earnings of $0.55, thanks to increased cost cutting and a lower tax rate. All in all, Wall Street seemed less than impressed with the release, and shares of Pfizer dipped on the news.

In the first quarter, total revenues declined 9% year over year, to $11.4 billion (calculations are against the originally reported figures), continuing a downward trend that dates back to the fourth quarter of 2011. While the pace of top-line erosion has decelerated somewhat in recent quarters, thanks to improvements in several core franchises, the company continues to be plagued by intense generic competition on a few of its former blockbuster drugs and the recent conclusion of a lucrative partnership. The first-quarter earnings decline primarily reflected the expiration of a collaboration agreement for ENBREL in the United States and Canada, the ongoing expiration of SPIRIVA in certain countries, and continued generic erosion on LIPITOR (sales down 27%) and VIAGRA (down 19%). This was partially offset by strong growth in Pfizer's top-grossing franchise LYRICA (+10), and solid contributions from new comers XALKORI (+66%) and INLYTA (+40%).

While top-line pressure is likely to persist in the coming quarters, we see several drivers that could potentially lead to improved comparisons over the 2014-2015 timeframe. First, the elimination of the LIPITOR overhang. Due to the availability of cheaper generics, sales declines of the popular cholesterol-fighting medication have been by far the biggest drag on the top line over the past two years. However, with the brunt of the generic impact already being felt (currently represents 4% of total sales), the company appears well positioned to turn a corner in the near future. Second, the further development of the LYRICA franchise. LYRICA has turned into Pfizer's pre-eminent offering since the LIPITOR fallout, and currently accounts for more than 10% of total revenues. Maintaining this product's momentum will be crucial in ensuring stability over the longer term. Lastly, increased focus on its surging oncology business. In the first quarter, oncology sales increased 10%, driven by solid uptake of XALKORI and INLYTA. Although the unit currently only accounts for about 4% of the top line, we see it as a significant opportunity for Pfizer given its high-growth potential.

Meanwhile, the most-talked about topic surrounding Pfizer of late has to do with its potential takeover of United Kingdom-based rival AstraZeneca (AZN). Management revealed last month that it has been trying to purchase the London-based drugmaker since January, but has been rejected three times. AstraZeneca claims that Pfizer's most recent offer of about $106 billion in cash and stock significantly undervalued its prospects, particularly its portfolio of drugs in development. This will certainly be something worth monitoring in the coming months and investors should stay tuned.

All told, our investment thesis for Pfizer stock remains largely intact since our April 11th full-page report. Pfizer is a relatively safe bet in the pharmaceutical space due to its strong financials and decent fundamentals, sizable share in most markets, and impressive track record. Its ongoing commitment to returning value to shareholders through stock repurchases and healthy dividend payouts is also a key positive. For investors seeking an attractive and well-defined total return play with relative stability, high-quality Pfizer stock has an above-average dividend yield and a top rank for Safety (1). The company's Financial Strength (A++) is also top notch.

About The Company:Pfizer is a major producer of pharmaceuticals, hospital products, consumer products, and animal health lines. Important product names include NORVASC (cardiovascular); ZOLOFT (antidepressant); ZITHROMAX (antibiotic); LIPITOR (cholesterol); ARICEPT (Alzheimer’s); CARDURA (cardiovascular); DIFLUCAN (antifungal); ZYRTEC (antihistamine); VIAGRA (impotence); and CELEBREX (rheumatoid arthritis and osteoarthritis).

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.