Name That Trade – $PFE At 7 Year Highs

by Enis March 28, 2013 2:57 pm • Commentary

As health care continues to be the clear leader in this market, I wanted to focus on the largest health care stock in the world, staid, old Pfizer.  Pfizer was viewed as a bloated, uninventive, bureaucratic nightmare several years ago.  I’m reluctant to declare that Pfizer has undergone revolutionary transformation.  Rather, as happens so often in the stock market, the health care sector as a whole is now a new hot spot for money, and PFE stock is a direct beneficiary.

Starting with the 20 year monthly chart:

20 year monthly chart of PFE, Courtesy of Bloomberg
20 year monthly chart of PFE, Courtesy of Bloomberg

So PFE stock was really in a long-term decline ever since its 1999-2000 peak.  Amazingly, PFE has earned between 1.50 and 2.50 per share in every year since 2002, with very little earnings variability throughout the bull and bear cycles.  What is it projected to earn in 2013 and 2014?  2.28 and 2.37 per share respectively.

In that period, it has gone from paying 0.52 per share of dividends for calendar year 2002, to 0.88 per share for calendar year 2012.  So a bit more dividends, similar earnings per share, and little projected growth.

However, PFE’s 10 year decline in stock price from 1999-2000 to 2009-2010 finally attracted enough value buyers to turn around the stock’s trajectory.  Here is the 10 year chart of the trailing P/E in Pfizer:    

[caption id="attachment_24204" align="alignnone" width="504"]10 year chart of Trailing P/E in PFE 10 year chart of Trailing P/E in PFE, Courtesy of Bloomberg[/caption]

Here is the key – PFE is priced at the same multiple as its 2005-2006 valuation range, with a similar earnings profile (again 1.50-2.50 for the past 10 years).  In my view, there is a simple pro and a con to this situation.  Pro:  Investors are much more desperate for yield today than they were in 2005-2006, rendering PFE’s stable dividend yield an attractive alternative.  Con:  People who bought PFE in 2005 and 2006 saw their investment cut in half in 3 years.  PFE is a surprisingly similar company to what it was the last time it traded at $30 in 2004.  Whether that’s bullish or bearish is less clear.

From a technical perspective, PFE’s chart does not yet show signs of concern.  PFE’s long-term downtrend was really broken in 2012, and a new uptrend has now formed.  Zooming in on the 3 year chart:

[caption id="attachment_24205" align="alignnone" width="631"]3 year daily chart of PFE, Courtesy of Bloomberg 3 year daily chart of PFE, Courtesy of Bloomberg[/caption]

The 200 day ma in black has been steadily rising for the past year, and the stock has not breached it since 2011.  However, in the very short-term, the stock is about 15% above its 200 day ma, which is overextended for PFE historically.

Put it all together, and I do expect the next pullback in PFE to be a buying opportunity on a short-term basis.  Implied vol and realized vol are both in the low teens, so no anomalies in the options market.  Buying a simple call spread might be the trade on a pullback to the $26-$27 area.  But I’m less enamored with the long-term prospects of PFE here.  Some are treating it as a bond, but it’s a bond that has gone down more than 25% in years past.