Billionaire Ken Fisher isn’t only the head of Fisher Asset Management, but also a long-running Forbes columnist whose picks published in that magazine have tended to outperform the market on average. The December 2012 issue of Forbes collects stock picks from a number of market players, and Fisher’s contribution to the special edition includes a recommendation for investors to be long Pfizer Inc. (NYSE:PFE). For anyone who follows Fisher Asset Management, this pick isn’t much of a surprise: the fund increased its holdings of Pfizer by 45% during the third quarter to a total of 32 million shares, and as of the end of September it was the largest position by market value in Fisher’s 13F portfolio. Find more of billionaire Ken Fisher’s favorite stocks.
Fisher made three arguments for Pfizer Inc.: its branded drug portfolio, growth opportunities, and a low valuation. At 19 times trailing earnings, the valuation based on the current state of Pfizer’s business actually doesn’t look that cheap to us. It certainly has a lot of good brand names under its roof, including Celebrex, Lipitor, and (of course) Viagra, so that is something of a positive, but the primary purpose of branded drugs is to drive high margins and that’s mostly accounted for in earnings multiples. Should Pfizer get some premium based on its brands? Yes, but at a trailing P/E of 19 we’d have to see good growth prospects.
That’s where the challenge is. In the third quarter of 2012, Pfizer Inc. reported a 16% decrease in revenue compared to the same period a year ago, and with similar margins earnings declined about as much. A reduction in share count helped limit the drop in earnings per share, and net income had been increasing in the first half of the year (though that came off of lower revenues), so Pfizer actually earned a penny more per share in the first three quarters of 2012 versus the first three quarters of 2011. Still, that’s very little growth. Wall Street analysts expect much better numbers in 2013, and so the forward P/E is only 11, but we’re skeptical that Pfizer can improve that much. We would note a case for the stock that Fisher ignored: with a beta of 0.7 and a 3.6% dividend yield at current prices, it could be a good defensive stock (as many other megacap pharmaceutical companies would be).
Cliff Asness’s AQR Capital Management also liked Pfizer during the third quarter, as that fund increased its own stake by 37% to 7.9 million shares (see more of Cliff Asness’s stock picks). Healthcare-focused Orbimed Advisors had Pfizer as its largest stock holding at the end of September, though it had sold shares during the quarter (check out more moves in the healthcare sector at Orbimed Advisors).
Pfizer’s peers include Merck & Co., Inc. (NYSE:MRK), Novartis AG (NYSE:NVS), Sanofi SA (NYSE:SNY), and Abbott Laboratories (NYSE:ABT). Sanofi is the only one of these stocks with a beta of 1 or greater, and all pay dividend yields of at least 3%. So Pfizer doesn’t seem to have any particular advantage for defensive-minded investors. In terms of P/E multiples, these four large drug manufacturers trade at 15 to 20 times trailing earnings, placing Pfizer towards the higher end of the range implied by its peers but not substantially overpriced. However, the numbers for the third quarter are in at each of these companies and with the exception of Sanofi earnings appear more stable at these peers.
Given this analysis it seems to us that Pfizer’s business prospects are at best even with those of its peers, with the stock trading towards the upper end of the range of trailing P/E multiples for megacaps in its industry. As a result we’re not as excited as Fisher is about Pfizer, and it’s possible that another large pharmaceutical company such as Novartis or Abbott Labs might be a better buy.