Streetwise
Lauren Rudd
Sunday, April 20,
2008
Now Is The Time To Step Up To The Bar
If you have not already done so, now is time to step up the
bar and take responsibility for your financial future. Yes, the financial
markets have been volatile of late and the major players on Wall Street have
shown little inclination to do anything but line their own pockets and the rest
of the world be damned.
I do not want to ruin your day but the financial markets have
always been driven by greed. Furthermore, the wealthiest are often the
greediest. This is no sudden epiphany; it has been so throughout history.
Technology has only changed the way and speed with which we do business, not the
seemingly insatiable desire for ever increasing amounts of wealth.
However, the Street’s antics should not act as an impediment
to your investment decisions. When you invest in individual stocks, you are not
buying the market, or Wall Street, or the continually touted Dow Jones
industrial average. Rather you are creating a partnership with what should be a
dozen or more high quality companies whose projected future success coincides
with your own analysis of their prospects.
Selecting those appropriate companies is not difficult. If you
have the wherewithal to be able to write your name and address and can use a
telephone or a computer, you are already half-way there. Now all that is left is
to select a few investment candidates.
Consider steering your search in the direction of large
profitable dividend paying blue chip companies that are under appreciated. A
good example is Wyeth. Wyeth was an admirable performer a number of years back.
Unfortunately, the situation reversed itself beginning with the “fen-phen”
weight loss craze of the late 1990s.
Wyeth’s two diet drugs, Redux and Pondimin, were implicated in
causing severe heart-valve damage and primary pulmonary hypertension. Faced with
countless lawsuits, the litigation dragged on for over 10 years and cost the
company an astounding $21 billion. Compounding the problem was the delay in
approving Pristiq, a drug for menopausal symptoms, by the FDA. At the same time,
Bifeprunox, an anti-psychotic medication, was denied approval. Wyeth also lost
out on a preliminary injunction to prevent Teva Pharmaceuticals from releasing a
generic version of Protonix. Protonix is worth about $1.9 billion in annual
sales to Wyeth.
That was the bad news. Now for the good news; Wyeth enjoys $22
billion in sales and has a strong balance sheet. Last year its gross margin was
about 72 percent and it earned about 20 cents net profit after taxes on every
dollar of sales. Furthermore, despite its setbacks the company has a strong
pharmaceutical offering and a promising pipeline of new offerings. This is the
key to Wyeth’s future.
For example, Wyeth is currently conducting phase III trials
under a fast track approval from the FDA of AAB-001, a monoclonal antibody named
bapineuzumab for combating Alzheimer’s. The 4,100 participants make it the
largest Alzheimer’s trial ever. The company also has 10 other drugs to combat
Alzheimer’s under development.
Understand that Wyeth has been out of favor on Wall Street.
Yet, that could be changing. According to an article in Barron’s, two analysts
were quoted as valuing Wyeth’s assets, such as its biologics and vaccines, at
between $41 and $48 per share, meaning you are getting the pipeline for free.
The shares currently sell for a reasonable 12 times earnings.
Looking at the intrinsic value of the stock, a discounted
earnings approach produces an intrinsic value of $53, while a discounted free
cash flow to the firm model offers up an intrinsic value of $88 per share as
compared to a current share price of $44.
My earnings estimate for 2008 is $3.45 per share and $3.70 per
share in 2009, with a 12 target price on the shares of $51 for an annual gain of
16 percent, to which you need to add a current dividend yield of 2.5 percent for
an overall possible gain this year of 18.5 percent.
