Has Pfizer Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Pfizer (NYS: PFE) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Pfizer.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.3%

Fail

 

1-Year Revenue Growth > 12%

(7.2%)

Fail

Margins

Gross Margin > 35%

80.7%

Pass

 

Net Margin > 15%

15.6%

Pass

Balance Sheet

Debt to Equity < 50%

48.3%

Pass

 

Current Ratio > 1.3

1.91

Pass

Opportunities

Return on Equity > 15%

10.7%

Fail

Valuation

Normalized P/E < 20

16.06

Pass

Dividends

Current Yield > 2%

3.6%

Pass

 

5-Year Dividend Growth > 10%

(5.4%)

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Pfizer last year, the company held onto the point it gained between 2010 and 2011. The stock is up 25% in the past year, but the drugmaker faces a huge challenge that could threaten its score in years to come.

Pfizer has provided huge returns for investors over the years, thanks to its stable of blockbuster drugs. With major patent cliffs approaching for Merck (NYS: MRK) , Eli Lilly (NYS: LLY) , and especially Pfizer, investors had a lot of concerns about the ability of big pharma stocks to hold up, and responded by pushing valuations down to very low levels. Yet those lower bars set the stage for outperformance, which Pfizer and its peers have delivered soundly in recent months.

Still, the recent loss of patent protection for blockbuster drug Lipitor has had a decided impact on the company's revenue. In its most recent quarter, Pfizer saw revenue plunge 16%, with sales of Lipitor dropping 87% in the U.S. and 71% around the world. Despite attempts to sustain sales of generic Lipitor, the cheaper price means Pfizer will never see anything close to peak revenue from the drug again.

To restore the pipeline, Pfizer has dozens of drugs in development. In September, its chronic myelogenous leukemia drug bosutinib got approval as an orphan drug from the Food and Drug Administration. Pfizer's hoping to get a similar boost from tofacitinib, which it's targeting for rheumatoid arthritis. And despite a setback for potential blockbuster Eliquis when the FDA asked for more data in June, Pfizer and partner Bristol-Myers Squibb (NYS: BMY) have resubmitted the requested information and are hoping for approval soon.

Pfizer remains committed to its core drug business, following the same path as Abbott Labs (NYS: ABT) by reorganizing to get rid of peripheral units. While Abbott is moving toward splitting off its medical device business from its drug development segment, Pfizer sold its nutrition business to Nestle in April and expects to spin off its Zoetis animal-health unit in the first half of next year.

For Pfizer to improve, it needs to get its pipeline humming again to replace Lipitor's lost revenue. If it succeeds, then Pfizer has plenty of room to run toward perfection in the future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

While you can certainly make huge gains in pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Pfizer to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Pfizer Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum