Dow member and pharmaceutical heavyweight Pfizer (PFE - Free Pfizer Stock Report) has been in the news plenty in recent months. The New York-based company first grabbed investor attention in a big way after announcing in November, 2015 that it was going to acquire Ireland-based maker of Botox Allergan plc (AGN) through a tax-inversion deal worth an eye-popping total of roughly $160 billion. (Remember, in a tax-inversion set-up, a U.S. corporation buys a foreign company and establishes its domicile abroad, with the purpose of lowering its tax bill.) But in April, following aggressive tax-rule changes, spearheaded by the Obama administration, that essentially discourage these types of mergers with foreign entities and help to eliminate the tax loophole, Pfizer and Allergan mutually decided to terminate their deal.
Although somewhat disappointing, the news didn’t exactly come as a shock to investors, given the tough regulatory hurdles and scrutiny the deal faced, not to mention the harsh criticism it endured from the government, political figures, and some investors. The high level of uncertainty associated with the merger seemed to be baked into PFE’s stock price, as it began to lose steam early in 2016. The failed Allergan deal isn’t the first one for Pfizer. In 2014, its pursuit of British drug giant AstraZeneca (AZN) ended after its offers were repeatedly rejected.
The proposed Allergan merger flop sent Pfizer back to the drawing board, in terms of what route to take to boost business. It’s no secret that the drug giant’s sales and profits have been weakening in recent years, as evidenced in the Statistical Array of the Value Line report. Like many large corporations, Pfizer has struggled to drive growth of late, a dilemma that became more apparent following the loss of patent protection of its blockbuster cholesterol drug Lipitor in late 2011. Although its other top-selling medications (Prevnar, Lyrica, and Enbrel) have helped to pick up some of the slack, PFE recognizes the need to do more to prevent the company from falling behind in the highly competitive pharmaceutical race.
At this juncture, Pfizer is weighing its options, which include either continuing with its strategy of expanding via acquisitions or splitting up the business altogether. The latter has been done in the past; a recent restructuring led to the creation of one unit for its brand-name medicines and another for drugs that have lost patent protection. To wit, management is considering separating its Global Established Pharmaceuticals (GEP) business from the rest of the group, with a decision expected to come before the end of 2016. This is mentioned in the Commentary section of our report.
Meanwhile, in late August, Pfizer announced it will buy Medivation (MDVN) for $81.50 a share in cash, or a total of $14 billion, beating out several contenders including French drug titan Sanofi (SNY), whose takeover bid turned hostile. While the deal pales in comparison to the big bucks PFE would’ve shelled out for Allergan, it will enable the company to add Xtandi, a widely used prostate cancer treatment, to its small cancer portfolio, which includes its blockbuster breast cancer drug Ibrance, launched in 2015. The Medivation purchase, scheduled to close before yearend, should dovetail nicely with Pfizer’s strategy of making a bigger push into oncology, an area of the drug industry where major discoveries and development in immunotherapy are proving to be a game-changer in the fight against cancer and the sales potential is especially sizable.
So what is an investor to do? From an investment perspective, there’s a lot to like about PFE and the Value Line page should serve as a good guide for anyone contemplating a stake in it. For starters, note that the Timeliness rank (found in the Ranks box at the top left corner) has been reinstated on Pfizer stock, after news surfaced that the Allergan deal fell through. (The rank was previously suspended when the merger agreement was announced, since the stock was not necessarily trading on fundamentals.) As of our latest report, its 1 (Highest) Timeliness rank suggests that PFE is expected to outperform the broader market indices over the next six- to 12-month period, making it appropriate for momentum-based (short-term) accounts. For the long haul, though, the stock is not an overly alluring choice at the recent price. In fact, as illustrated in the Projections box, Pfizer’s 3- to 5-year total return potential, which factors in price-appreciation potential and prospective dividend payments, is fairly average compared to all equities under our coverage.
Still, the blue chip has a number of standout qualities that add to its appeal, namely a low-risk profile. More specifically, PFE sports a top-notch Safety rank of 1 (Ranks box) and an excellent Financial Strength score of A++, displayed in the Ratings section at the bottom right-hand corner of the Value Line page. These indicators largely reflect the company’s strong financial position, supported by a healthy balance sheet, which includes a hefty cash pile and a very manageable level of debt (31% of total capital). Other highly favorable metrics include a Price Stability mark of 95 and a beta Coefficient of 0.85, suggesting that the equity is largely stable.
PFE’s income component is noteworthy, too. The equity offers a solid 3.5% Dividend Yield (Top Label), well above the Value Line median, so investors stand to pocket some good cash here. What’s more, the analyst’s projection of 6.5% dividend growth (Annual Rates box) means decent increases are likely out to late decade. All in all, we think the Dow issue warrants a closer look. Analyst Michael Ratty sums it up in the Commentary section by saying “we continue to view Pfizer as a strong core holding for investors seeking exposure to the pharmaceutical industry”.