Pfizer's Bear's Den
by Louis Corrigan [email protected]

year ago, Pfizer traded at around $50 a share. Since then, it has delivered $1.76 per share in earnings, beating analyst estimates over this period by all of one penny. Nonetheless, the stock price has more than doubled. A contingent of some 30 or so analysts now expect the drug maker to deliver $2.08 EPS this year and $2.55 in FY99. Even using the high-side estimates of $2.35 per share for FY98 and $2.90 for FY99, the stock trades at about 46 times this year's earnings and 37 times earnings 18 months out.

Meanwhile, those very same analysts see a long-term growth rate of just 20% max. So, even using the most generous numbers possible on a firm that's barely managed to meet the less generous consensus of late, Pfizer sports an eye-popping PEG ratio of 3.07. The PEG isn't entirely appropriate for such a large company, so consider the YPEG. For the stock to reach its forward YPEG fair value of $58, it basically needs to be sliced in half over the next 18 months. Sounds like a great investment!

Now, I'll grant that in the current high-growth, low-inflation environment, a well-positioned pharmaceutical giant like Pfizer (#4 in the world) deserves a premium valuation. And with half of America worked up over Viagra and the rest of Pfizer's drug pipeline looking potent, it's easy to come to the conclusion that this company has the staying power to remain flush with success for the foreseeable future. Not even a pox of bad puns seems likely to hurt.

Still, this drug maker sells at a very fat premium given its recent historical performance. Consider that over the past three fiscal years, Pfizer has delivered 16.2% compound annual growth in revenues, 19.5% in net income, and 17.8% in EPS. Meanwhile, the chart shows that the stock has soared by 70% per year over the past three years, or four times as fast as EPS growth.

Over those three years, revenue growth has actually decelerated (from 26% in FY95 to 13% in FY96 to 11% in FY97). While the first quarter FY98 results didn't benefit from Viagra and were deflated four percentage points due to currency translations, revenues, nonetheless, grew by just 11%. While EPS did increase 15% to $0.53, in line with estimates, Pfizer only made the number thanks to two cents per share in one-time gains. Moreover, essentially all the improvement in net margins over the past three years (a central driver in EPS outpacing revenue growth) has been due to its tax rate, which has dropped from 32.1% in FY95 to 28% in FY97 and in the most recent quarter.

All of this begs the question: How much of Pfizer's future good times are already factored into the stock price? After all, paying too much for a great company may ultimately allow you to beat the market if your time horizon is twenty years, but it's no roll in the hay.

There's no question that Pfizer shares have swelled due to Viagra mania. But the good news is out. Viagra is common knowledge not just among CNBC junkies but to every person on the planet who has ever thought about investing. The drug's phenomenal early acceptance is in the stock price already because it's definitely in the EPS estimates.

Anyone familiar with Michael Lewis's Liar's Poker knows the big swinging propensity of Wall Streeters to be in close touch with their manhood. Now imagine you're an analyst preparing numbers on Viagra sales. What would it say about you if your estimates looked too puny? That may sound silly, but Wall Street is a silly place.

Media hyperbole to the contrary, Viagra isn't going to usher in some new sexual revolution. For starters, 30% of men suffering from erection troubles don't benefit from Viagra at all. Those folks won't be buying more. Also, as the spate of Viagra-related deaths suggests, many others shouldn't touch the stuff due to generally poor health or heart conditions that leave them taking nitrates. Even more sadly, a vast group of older Americans is about to come to strikingly new terms with themselves and their partners via a very new form of post-coital depression.

Despite the countless success stories of revivified relationships, many second honeymoons will end with the men (and women) realizing that sex isn't really what they've been missing all these years. The reasons will vary. Some will find they're not in good enough shape to enjoy sex. Some will find that their relationships have reached a stage where intercourse is almost an unwanted complication. Others will find that solving the mechanical problem of erectile dysfunction only foregrounds their emotional deficiencies when it comes to the sticky issue of physical intimacy and desire. The only thing worse than being unmanned in a culture preoccupied with sex appeal is to be suddenly thrust into a world of varied new performance anxieties.

This may be just my mistaken stab at cultural analysis, but Viagra takes us into a very new realm of designer drugs. Viagra doesn't make or keep you healthy. It also doesn't simply make you feel good like Prozac or various recreational drugs. Rather, it gives you an opportunity to make yourself feel good. That's an awesome and, in some ways, burdensome gift. Bottom line, I believe that the expectations of the analysts and of Viagra users themselves may initially be met, and perhaps exceeded. But sales will eventually fall well short of the mark because this drug is not the fountain of youth but rather a kind of Pandora's box.

In that case, the best that can be said of Pfizer is that it can then tap an even larger market for its antidepressant Zoloft. That's not a bad backup plan, but I doubt it will be enough to justify Pfizer's lofty price-to-earnings multiple.

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