Streetwise
Lauren Rudd
Sunday, February 1,
2009
No Relationship Between Past and Future Share Prices
If you are going to invest on Wall Street, please be
cognizant of the fact that there is no relationship between historical and
future stock prices. The past will not predict the future unless you have the
exact same initial conditions, which is impossible. Does that mean you ignore
historical data? No, you simply need to put the data in proper perspective.
Unfortunately, whenever there is an increase in volatility,
or a downward trend in share prices, there is a greater the tendency on the part
of investors to lean on boisterous prognosticators for advice. That is a
mistake. Never take the opinions you hear and read to be the gospel.
Continuing with that line of reasoning, you should never let
anyone pressure you into making a quick investment decision. A person selling an
investment is unequivocally biased. It does not matter how many letters they
have after their name, how sincere they appear, or how long you have known them,
they sell for a living. Always obtain an independent second opinion, whether
from your own research or from an unbiased professional.
A no nonsense investment strategy will help you get through
what will likely be at least another year of economic turmoil. Furthermore,
virtually everyone, perhaps with a little training, can learn to select quality
investments that will stand up to the test of time. For example, Pfizer is an
excellent starting point for some research.
The company recently announced that it is purchasing rival
Wyeth for $68 billion, or about $50.19 per share, raising $22.5 billion of that
from a consortium of banks. Pfizer is one of the few companies with an “AAA”
credit rating. However, Pfizer also said that it is considering cutting its
dividend.
A dividend reduction and the Wyeth deal are protective moves
by Pfizer; given the likelihood of a substantial earnings decline when Lipitor
and Viagra come off patent protection. It is also the largest acquisition within
the pharmaceutical industry since Pfizer acquired Warner-Lambert for $93.4
billion in 2000.
If you look at Pfizer’s recently announced sales and earnings
for both the fourth quarter and the year, you can see why the Wyeth move was
both intelligent and necessary.
Pfizer reported fourth-quarter revenues of $12.3 billion, a
decrease of 4 percent when compared to a year-ago. The decrease was primarily
attributable to the negative impact of the loss of exclusivity for Zyrtec,
Camptosar and Norvasc.
Net income for the fourth quarter was $266 million, a decline
of 90 percent compared with the prior-year, while earnings per share came in at
$0.04, also a decrease of 90 percent when compared with the prior-year quarter.
For all of 2008, Pfizer posted revenues of $48.3 billion,
essentially flat compared to the $48.4 billion of a year ago. Net income came in
at $8.1 billion, essentially flat compared with the prior year; equating to
$1.30 in earnings per share, an increase of 3 percent when compared the prior
year’s $1.17.
The intrinsic value of the shares, using a discounted
earnings model, is $33. The parameters utilized are a projected earnings growth
rate for the first 10 years of 4.80 percent, 5.00 percent for each year after
that and a discount rate of 10.00 percent. If we look at the more conservative
free cash flow to the firm model, using basically the same parameters, the
intrinsic value is $50 per share. So there is obviously some inherent value in
the shares, even without Wyeth.
My earnings estimate for the 2009 fiscal year is $2.30 per share and $2.49 per
share for 2010, again without taking into account Wyeth, along with a 12-month
target price on the shares of $19, for a capital gain of 23 percent. Although
the shares currently return a dividend yield of 8.2 percent, it is likely that
Pfizer will reduce or eliminate the dividend.
