Pfizer's Bull's Pen
by Paul Larson ([email protected])

Let me start my bullish case by saying that, by any sort of earnings or cash flow valuation, Pfizer is going to look quite expensive. At over 60x trailing earnings, the company's stock can hardly be called cheap. Nevertheless, there are some downright valid reasons the market has bid the stock to such stratospheric heights. The price tag may be high, but we are talking about a top-shelf company that has a very bright future.

One of the most interesting things about Pfizer is that is a "Blue Chip plus Growth" stock. In this hectic world economy, investors are willing to pay premiums for large, quality companies that have an established track record. Past performance is no guarantee of future results, but it can be a pretty darn good indicator. And Pfizer's history of growing earnings and revenues steadily and predictably is impressive. Take a look at the company's resume:

- 47 consecutive years of sales growth
- 29 consecutive years of dividend growth
- 5-year history of growing earnings and profit margins
- Cited as the most admired drug company in 1997's Fortune survey

Rather astonishing, no? I think it's safe to say that Pfizer's status as a Blue Chip is cemented.

Nevertheless, the real justification for the lofty valuation has nothing to do with the previously reported earnings. Rather, what investors are excited about is the expected future growth the company will show in the years to come.

When looking at the company's financials, keep this one point in mind: Not a single dime of sales from Viagra (the company's impotency drug) has been shown in the trailing results. Saying that Viagra has been the most publicized new drug ever might actually be an understatement. No drug since penicillin has received so much fanfare and interest. When valuing Pfizer, remember to watch for the company's top line to rise at least several-hundred million dollars a quarter from this one product alone.

Even though Viagra has burst out of the gates, there is plenty of growth to be realized from this one drug in the coming years. The drug just recently received approval from the European Regulatory Committee for use across the big pond. Clearly, this is a drug that has global appeal. Furthermore, testing of Viagra on women could literally double Pfizer's potential market for the drug should it be found to "work" on females. The Viagra story is still in its initial chapters, and investors buying the stock today are laying claim to the potentially huge profits this drug alone can bring to the company.

Viagra is hardly the only blockbuster drug in the company's portfolio. Other drugs that are in the process of ramping up sales include the antibiotic Trovan, the cholesterol treatment Lipitor, and the anti-Alzheimer's drug Aricept. None of these drugs will carry the pomp and circumstance of Viagra, but their effect on the bottom line could be just as dramatic. Keep in mind that all of these drugs are in addition to the cash cow drugs of Norvasc, Zoloft, and Procardia.

The road has also been laid for Pfizer to discover other new, exciting drugs. The company spends nearly $2 billion on research annually, which puts it near the top of the pile as far as advanced development spending. The money spent here can be viewed as an investment in the future. And if history is any guide, I think it's a safe bet that we will see numerous other breakthroughs from the fine scientists at Pfizer down the road.

Furthermore, the company is set to benefit from the macro-economic trend of an aging population. With all the baby-boomers coming of age, it is likely that pharmaceutical sales will increase across the board in the coming years. As they say, a rising tide raises all ships.

There is also little to worry about concerning the company's balance sheet. The company is in the Cash-King Portfolio for good reason. Investors in Pfizer also have regular stock buybacks and a small dividend helping to increase their value.

Put all these points together and this Fool's conclusion is that Pfizer is a Blue Chip company with an impressive record and exciting growth prospects. Few companies are better positioned to harvest profits from the existing markets while pumping money into the future. It's a rare company that can effectively use the power of compounding in its favor, and Pfizer is certainly one of those rare birds. Sure the stock looks expensive, but look a little deeper and much of the so-called froth is entirely justified.

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