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Stock of the Week


August 20th 2013 Pfizer
NYSE Symbol: PFE
Industry: drug maker
Price as of 8/19: $28.46

The day of reckoning has come to the bond market as interest rates start their climb higher. The backup in yields has put a halt to the stock market's upward climb to new all-time highs. The broader market is in a 4% correction, modest compared to the 18% pullback in long term rates. So the big question is where to invest? Typically bond funds perform well in a stock market decline, but this time, the stock market pullback is due to higher interest rates. Money has been rotating into the technology sector along with developed markets like Europe. Even the emerging markets are slowly improving as many investors avoided the region due to growth concerns coming out of China. Defensive sectors like utilities and telecom are underperforming due to their interest rate sensitivity. Dividend yields for a number of utility and telecom stocks are above 4%. AT&T is above 5% once again. Healthcare is the lone defensive sector that remains an intriguing play. Healthcare is not only the top sector in 2013, but has held up better in this correction. This week we'll highlight a blue chip drug maker in a modest correction. The stock of the week is Pfizer. After years of underperformance, Pfizer has come back to life as the company puts their patent expirations behind them. Profits and cash flow remain key for Pfizer allowing the company to buy back stock and boost their dividend. Pfizer is not a growth stock, but with a yield 3.35% with earnings poised to grow once again, Pfizer's recent pullback looks like a good entry point.

Back in July, Pfizer reported second-quarter earnings excluding one-time items of 56 cents a share, 1 cent more than the average of 15 analysts' estimates compiled by Bloomberg. Net income rose more than fourfold from a year earlier to $14.1 billion, or $1.98 a share, helped by the spinoff of the company's animal-health unit and a patent settlement. The company has shed nondrug assets, jettisoning its animal health and nutritional products units and has used the proceeds to repurchase stock. Its pipeline is proving productive once again. Already this year, Pfizer has launched a new rheumatoid arthritis drug and a blood thinnerboth potential blockbustersand awaits late-stage study results on a promising breast cancer drug and the use of the Prevnar 13 vaccine in adults. Generics remain a sticking point for blockbuster drugs like Lipitor for cholesterol, but the worst of the company's patent expirations are over. As drugs in late-stage development come to market, earnings should rise an average of 7% a year through the end of the decade on 1% yearly revenue gains. Another catalyst for Pfizer is the possible plan to split the fast-growth portion of its drug business from slower-growing ones in a restructuring. That could earn it a higher valuation, because at 12 times next year's earnings forecast, it now trades roughly in line with slow growers like Merck (MRK) rather than fast growers like Bristol-Myers Squibb (BMY), at 21 times earnings. Any spin off is years in the making.

Even without any pending spinoff, Pfizer looks attractive. As mentioned, the stock trades for 12 times earnings, but also trades for 3 times sales and 2 times book value. At present levels, Pfizer looks like a value play with a great dividend yield with a couple catalysts in the form of improving earnings and a possible restructuring.