Pfizer Inc (PFE)

Over the last year or so, it has run up a fair bit and is now trading in the range of 15 or 16 times earnings and dividends have come down. A problem he has with pure pharmaceutical companies is that they are very dependent on their pipelines. Pipelines in this business are still pretty good, but unfortunately they are not big blockbuster drugs any more. He prefers something like Johnson & Johnson (JNJ-N) which has pharmaceuticals, medical devices and consumer products.

Likes to find sectors that have been out of favour for some time. This sector had the patent cliff. A lot of companies restructured and some became distribution businesses. PFE made acquisitions. Little growth now and predictability. Pays out less than 50% of earnings. Health care is the biggest industry in the US as the population ages. He owns MRK. Look at the biotech sector because that is the companies being acquired.

Organic growth in large cap pharmaceutical companies is something like 2%-3% and in order to offset that, they sell non-core assets and put that money back in their pipeline. This company’s pipeline has Prevnar which they are going to use in adults, as well as a breast cancer drug. These 2 drugs combined he feels are somewhere in the $2 billion range over the next couple of years. Feels the stock is worth $35-$36 on an analysis basis. Yield of 3.25%.

Not very expensive at 13X earnings with a 3.5% dividend yield. Great free cash flow yield of around 7%. He prefers Abbott Labs (ABT-N) or Johnson & Johnson (JNJ-N) because they are not pure pharmaceutical companies.

(A Top Pick Dec 4/12. Up 25.77%.) Sold his holdings at around $29. On a good correction, he would go back into this one.

A slow and steady chug along company that doesn’t interest him. It is sort of fighting the inevitability of very expensive capital intensive new breakthrough drugs going off patent. Lipitor is the poster boy of this. It was a multibillion dollar revenue producer and when it went off patent, they have been seeing declining revenues ever since.

Most of the pharmaceutical companies are vastly overvalued. Hard to see earnings growth going forward. For all of these big, pharmas you are paying too big a price for the multiples of earnings. The only one that he finds very cheap in this area is Teva (TEVA-N) which everybody hates.

(A Top Pick Oct 15/12. Up 23.72%.) At the moment, the stock is doing quite well. He is looking at it, but is not unhappy to continue holding it. Good story long-term.

Has been executing very, very well. They have a really good pipeline. They all had a patent cliff, but PFE had a pipeline behind it from Wyeth whom they acquired.

(Top Pick Oct 5/12, Up 18.02%) Is at an entry point today. Model price $34.35, 17% upside. These assets are cheap and should do well for the next year or more.

Thinks this one is worth $34-$35 over the longer-term. Healthcare legislation in the US doesn’t actually affect this company. About 60% of its revenues are derived from overseas. Healthcare legislation will basically add plans for them. Distribution of drugs domestically and overseas continues to grow for them. Very solid balance sheet and relatively low payout ratios. Good dividend support.

(A Top Pick September 14/12. Up 24.2%.) Good story long-term.

One of the problems he has with the pharmaceutical industry is that it went out to people with fantastic drugs worth billions and billions of dollars. Because of this, people thought they were a growth stock and gave them a multiple on the growth side. This one trades at around 12.8X earnings with a free cash flow yield of around 8% or so it is not expensive. However, drugs are coming off patent. He prefers a company like Johnson & Johnson (JNJ-N) which is a 3^rd Pharma, a 3^rd medical devices and a 3^rd consumer products.

Has done well on the back of cost cutting. Have not grown revenue much. Drugs are going off patent. A drug like Lipitor or Viagra are tough to overcome. Drug companies are slow to come out with replacement drugs. He would prefer Merck (MRK-N).

(A Top Pick July 31/12. Up 27.42%.) His model price is $33.86 so it still has a 15% upside. 3.28% yield.