Pfizer - Financial Analysis

Topics: Financial ratio, Financial ratios, Dividend yield Pages: 6 (2555 words) Published: March 2, 2011
Name: Khiem Nguyen
Introduction and Shareholder Analysis
Pfizer (NYSE: PFE) is involved in the development, manufacturing and marketing of pharmaceutical products. The industry is intensely competitive. There are a few unique characteristics. Pharmaceutical products have long and expensive development periods – upwards of ten years and $100 million depending on the nature of the drug and the scope of the clinical trials process. In order to encourage companies to engage in innovation, companies are given lengthy patent protection for their drugs upon receiving regulatory approval. This allows them to charge monopoly rents so that they may recover the development cost. A product brought to market is often highly lucrative, so success in the industry depends largely on the firm’s ability to bring product to market and capitalize on the monopoly rents. According to MSN Moneycentral, Pfizer’s share price closed on November 19, 2009 at $18.11. Over the past two years, Pfizer shares have generally declined. The stock ended November 2007 at $27.49, meaning that it has fallen 34% over the past two years. In that same span, the S&P 500 has declined around 21%. In order to compare the performance of Pfizer to the performance of the market, these figures need to be adjusted for risk. Pfizer’s beta is 0.76. Therefore, if the market declined 21%, Pfizer should have declined (0.76)(21) = 16%. That Pfizer has dropped 34% indicates that the stock has underperformed dramatically for the past two years. Shareholders are not getting the returns they would have expected from Pfizer stock. Liquidity and Solvency

Pfizer’s liquidity situation has deteriorated in recent years. In 2005, the company’s current ratio was 1.6:1. This improved to 2.2:1 in 2006 but has since fallen back to 1.6:1. Even though this ratio is below the rule of thumb ratio of 2:1, it’s still higher than its industry competitors such as Merck that has a current ratio of 1.38:1. In addition, further analysis shows no sign of “window dressing”. Thus, Pfizer can be considered to be in good financial health within the pharmaceutical industry. On the other hand, the decreasing of current ratio indicates that Pfizer has seen its working capital reduced. This suggests a slowdown in business, particular if couple with a decline in other liquidity metrics. Moreover, Pfizer’s quick ratio has showed the same trend as the current ratio. The quick ratio measures only those elements of the current ratio that can be converted to cash quickly, such as short term investments and accounts receivable. It is valuable for two reasons. The first is as a basic liquidity measure. Compare to Merck’s quick ratio of 1.19, Pfizer’s 2008 quick ratio of 1.43 can be considered to be healthy within its industry. It has been better in the past – 1.9 for the last two years – but 1.43 is pretty close to the quick ratio of 2005. The other use of the quick ratio is that it removes inventories from the current ratio. In economic downturns, the current ratio can be abnormally large if the firm has excessive inventory supply. For Pfizer, however, the quick ratio supports the trend identified in the current ratio, that the company has seen its solvency reduced in the past year. The level, however, is healthy for both of the key liquidity ratios. Another means to identify liquidity and solvency issues is to examine the firm’s turnover ratios. The accounts receivable ratio measures the speed at which the receivables are being converted to cash. Pfizer’s receivables turnover improved last year from 5.03 times to 5.14 times. In addition, the average collection period declined from approximately 71.5 days to 70.1 days; the end of year collection period dropped from 74.2 days to 67.7 days. This indicates that Pfizer has tightened its collection period, the length of time it takes to convert the average sales into cash. Given how...
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