Tuesday, February 2, 2010

Pfizer Inc Raising target; risk-reward remains favorable

PFE is at our price target of $19, and we are raising it to $22. Our new $22 target is 9x our 2011E of $2.40 and is supported by DCF. We previously used a very conservative multiple assumption (9x trough 2012E of $2.10), which we are now raising to 10.5x trough 2012E.
Our investment thesis is that PFE stock can appreciate as the company realizes WYE merger synergies, management makes better capital allocation decisions, and pipeline newsflow accelerates in 2010-2011.

Pfizer's 2012E trough is the soonest, so it should be first among U.S. Major Pharma to return to growth. Our $22 target is 10.5x trough 2012E of $2.10. Note that we model troughs for BMY and LLY three years later (in 2015), and they trade at higher multiples on the troughs (BMY at 13.6x 2015E of $1.79 and LLY at 11.7x 2015E of $3.00). We model a 2013 trough for MRK, which trades at 11.8x our 2013E of $3.23. Please refer to p. 3.

More conservative 2012 guidance on Feb. 3rd should remove overhang. We expect mgmt to lower its 2012 $70B revenue target when PFE reports on Feb. 3rd because the target is unachievable, in our view. We model $59B in 2012 sales (cons. is at $60.5B), but we would guess that mgmt may project a higher amount including future acquisitions. Mgmt could also slightly lower its 2012 EPS target of $2.42 if additional cost cutting and future acquisitions do not fully offset revenue reductions. We project 2012E of $2.10, and consensus is at $2.20. Although some investors assume PFE will maintain its 2012E of $2.42, we would view it as upside surprise.

We forecast Pfizer to return to growth post-2012 and earn a higher stock multiple. We project 2012-2015 EPS growth of 3-5%. We note that mgmt anticipates "modest" top line growth and stronger bottom line performance on a "consistent and reliable basis."


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