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Pfizer: Heading Up?

Even the most ferocious bear is starting to see some light at Pfizer (PFE). The Street has been down on Big Pharma, and one of the most unrelenting is Richard Evans of Sanford C. Bernstein. Of late, he called Merck and Bristol-Myers Squibb "potential value traps" and advised clients to avoid them. They sport artificially low price-earnings ratios, based on inflated projections, he argues. But Evans thinks estimates of Pfizer's earnings aren't inflated, so the p-e ratio suggests that the "bear story" is already in the stock's depressed price, now 35.02.

Although Evans had been a big bear on Pfizer, he sees some near-term gains. "We envision 11.6% annual per-share earnings growth through 2006. Yet the stock implies only 9.5% growth," says Evans. Using that higher rate, he says, the price should be 38. He still has a neutral rating on Pfizer--"but it's hard to resist the stock," now, says Evans. "We would add to positions, especially below 35."

On June 12, Evans raised his earnings forecast for 2003 from $1.78 a share to $1.81, and for 2004 from $1.92 to $1.96. His 2002 estimate stays at $1.56. Pfizer trades at 22 times the 2002 estimate, 19 times the 2003 numbers, and 17 times 2004's figure. Pfizer made $1.31 in 2001. The p-e's are close to those of the industry and of the Standard & Poor's 500-stock index. Part of the deterioration in Pfizer's p-e is due to the industry slump. Some disadvantages he sees in Pfizer: slowing sales of Lipitor and Viagra, and lower margins from consumer products that Pfizer acquired when it bought Warner-Lambert in 2000.

Possible good news: Evans is betting Pfizer will buy back shares, given the stock's drop and its hefty cash hoard, and may spin off Warner-Lambert's consumer businesses, which he reckons are worth $8 billion--about $3.50 a share. By Gene G. Marcial

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