The Hindu Business Line : Pfizer: Hold

COME rain or shine, the focus at Pfizer appears to be on delivering results. That is the impression one gets looking at the company's earnings card for the quarter-ended August 2005. In a quarter that saw Mumbai being ravaged by rains, resulting in companies such as Pfizer suffering damage to stock due to flooding of warehouses, the company appears to have weathered the storm pretty well.

Our current view is driven by the sharp appreciation in the stock's price over the past few months; valuation levels, too, are rich. At the current price of Rs 825, the stock trades at stiff multiple of 28 times its expected sustainable per-share earnings for the year-ending November 2005.

Pfizer's operational metrics have seen a steady improvement on the back of initiatives such as a focus on cutting costs and a selective increase in product prices. This has shown up in the form of a healthy operating margin, which at 25 per cent for the latest quarter, is up by almost 10-percentage points on a year-on-year basis. For the nine-month period ended August 2005, margins are up by eight-percentage points at about 23 per cent. Admittedly, there is more work to be done on the operational front before Pfizer can rub shoulders with its other frontline MNC peers such as Aventis and GlaxoSmithKline, both of which have margins in the vicinity of the 30-per cent mark. A steady improvement in margins may well be the key theme at Pfizer over the next year or two.

On the products side, Pfizer has established brands such as Corex, Becosules and Gelusil in its basket. Incidentally, sales of Gelusil, too, are back on track after the company had voluntarily recalled stocks from the market last fiscal. As these products are fairly mature, we believe that the key trigger for Pfizer to move up to the next level would be the launch of patented products from its parent's portfolio.

Though such a launch is still some time away, it would be of interest to see whether it takes place through Pfizer or the unlisted subsidiary that came under the Pfizer fold consequent to its acquisition of Pharmacia. The subsidiary has a team of 50 handling specialty products in the oncology and ophthalmology therapeutic areas. A launch through the subsidiary would negatively impact sentiment towards the Pfizer stock.

We also note that the Pfizer dividend payout ratio over the last two years has been high, at close to 80 per cent and 65 per cent respectively. With earnings likely to expand significantly this fiscal, shareholders can expect a smart dividend, assuming last year's payout is maintained. Coupled with a strong cash position (about Rs 150 crore), Pfizer, in our view, is well placed to adopt shareholder-friendly measures. Such initiatives may cushion the stock's downside risk.

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