An Undervalued Blue Chip
Last Saturday morning I was sitting at the breakfast table reading the paper. For me, it’s always the business section first. The news was nothing new. The same old rehashed commentary on the performance of the markets.
I don’t need anyone to tell me October was a horrible month.
You’ll note from peak to trough we lost almost 2,500 points on the Dow Jones Industrial Average. Despite the rally the last week of the month, it’s still one of the worst months on record.
Despite the doom and gloom, I see a bright side to this.
It’s a great opportunity to buy value stocks at a deep discount. Think of it this way. There’s several types of investors. Two big groups are growth investors and value investors. Depending on the type of market we’re in, one group will outperform the other.
Right now, it’s the value investor’s time to shine.
How do I know? Simply by the state of the market. Look at values. Stocks have been crushed. Valuations are down big. P/E ratios are at new lows. Dividend yields are at new highs. It all points to buying undervalued stocks at a discount . . . finding stock prices unjustifiably low.
That’s how I found my favorite Drug Company.
Let me say this. I really like this company. So much so I bought it for my own account. Am I expecting an overnight homerun? No. I like this as a longer term investment. Something I find attractive at these valuation levels.
So, who’s the company? Pfizer (PFE).
I know what you’re thinking . . . that company’s a dog. The stock’s down more than 20% from the start of the year. They have major drugs going off patent. They’re struggling to develop new drugs for the major markets.
Yes, yes, and yes. All valid points.
But hear me out. Pfizer suffers from many of the same problem other drug companies face. Pfizer’s key drug Lipitor goes off patent in 2011. You either use this drug yourself or know someone who does (I have several family members taking it regularly). It’s a great cholesterol lowering drug. And a profitable one at that.
Amazingly, Lipitor accounted for more than $3.1 billion in sales last quarter.
Let’s look ahead. Pfizer has a number of other drugs steadily growing in market share: Lyrica, Celebrex, Viagra, Sutent, Xalatan, Zyvox and Geodon. These alone account for almost another $3 billion in sales.
The company’s also spending millions on R&D to expand their drug pipeline.
In addition, management’s aggressively cutting costs. Aggressive might be a bit of an understatement. They’re anticipating costs reductions of more than $2.0 billion dollars. It’s music to my ears.
Management seems to be feeling good about the prospects of the company. They tightened guidance with 2008 revenue being in the $48 to $49 billion range. They’re expecting Adjusted EPS to be $2.36 to $2.41 and Cash Flows from Operations of $17 to $18 billion.
All great numbers.
But here’s a number I like. 41 – it’s the number of consecutive years the company’s increased their dividend. In the last 10 years alone, the dividend increased an average of 18% per year. Not bad if you ask me.
Want to hear a better number . . . 280. When the company pays its dividend in December it will represent the 280th consecutive dividend to shareholders. (that’s 70 years!)
Right now the stock’s undervalued. It trades at just over 7 times next year’s earnings. The company posts an amazing 7% yield from its dividend (the five year average is just over 3%). They have more than $26 billion in cash and short term investments. In addition, they’re expecting operational cash flow of more than $17 billion this year.
I love this company as a long term investment. I think it’s one to buy and hold for the next 70 years.
Category: Stocks
