I consider both PFE and MRK to be fully valued. They both sell for 12 to 13 times consensus 2014 earnings with expected earnings growth rates no more than mid single-digits at least through 2015 and with dividend yields in the mid 3's.
Here are earnings expectations for both companies:
2012: $2.19 for PFE, $3.82 for MRK (actual)
2013: $2.21 for PFE, $3.51 for MRK (consensus)
2014: $2.35 for PFE, $3.79 for MRK (consensus)
2015: $2.43 for PFE, $4.02 for MRK (consensus)
2016: $2.57 for PFE, $4.61 for MRK (consensus)
There's little to excite about PFE's earnings growth prospects all the way through 2016. For MRK, there's hope in the form of 2016 earnings but hefty expirations are taking a big bite out of 2013 earnings and the fact is that earnings for 2014 will be no more than what they earned in 2012.
But just because there is little to get excited about with respect to the company's STOCK, there are nice prospects for those who consider deep out-of-tyhe-money naked puts such as the March 23-strikes.
These newly-introduced puts are currently trading at $58 per contract bid, $63 asked. Cash margin requirements at TD Ameritrade (andONLY art Ameritrade) arwe $293 per contract and up-front premiums after commissions for those selling at the bid price are $57.40. The nominal return for those holding the 9.8 months to March expiration is 19.6% which is 24$ annualized or a full 2% per month.
In order for a buy-and-hold Pfizer investor to earn 19.6%, the stock would have to be at least a $34 number factoring in the three dividend payments. Looking at those earnings prospects, what are the realistic chances of the stock getting much over $34 by then? On the iother side of the coin, there is the very real chance of the stock falling somewhat. Even at say $26, this wouldn't exactly be the buy of the century.
Now if the stock does fall to $26 at March expiration, buy-and-hold investors would be staring at an overall 7% LOSS (10% loss on the stock less 3% dividend
Thanks for the reply to my post. What is your opinion on the biotech companies such as Celgene and Biogen? Is it true that the biotech companies are less vulnerable to generic competition than the pharmaceutical companies such as Pfizer and Merck because it is much more difficult to copy a biotech drug receipe than it is to make a generic version of a successful pharmaceutical drug such as Lipitor or Singulaire?
Practically all of the drugmakers have had great runs the last six months and most are either fairly valued or overvalued. One that has not moved is TEVA which I consider the one that is safest and most undervalued at just seven times the 2014 consensus. There isn't a lot of growth there but it does pay a 3%-plus dividend similar to PFE and MRK.
CELG has had a fine run-up but valuations still aren't bad relative to growth prospects. Other than TEVA, it's the only one that I would consider buying now. BIIB is a similar 20% annual earnings grower but it's selling at 30 times earnings and the consensus one-year target price is 5% LESS than the current market quote. As a value investor, it's not my kind of stock.
Yes - biologics are tougher to replicate but biosimilars as they are called are making good inroads in Europe and it's just a matter of time before they are more prevalent here.
BIDU remains my favorite stock. Its growth rate is at least as great as CELG but it sells for only a multiple under 16 relative to 2014 expectations. It has always been known as the "Google of China" but now it has become both the Google AND the Netflix of China. I am already up by 27% in just two months on my 300K options investment.
On the other hand, a naked put investor selling the March 23's wouldn't be fazed at all by a stock price drop to $26. He would STILL earn that 19.6% for 9.8 months even while buy-and-hold investors wereLOSING money. So not only are the returns with naked puts superior unless that stock really takes off (unlikely for PFE with such tepid prospects) but there is considerable downside safety as well.
You say you don't know much about options or can't get the all-important NAKED put authorization at Ameritrade? Well, I consider myself to be an excellent teacher and moreover, all members of my investing group WILL receive naked put authorization and they will all receive 21% commission discounts as well.
The commission savings alone often are as much as or more than the 1% fee that I charge (a whopping $50 for a 5K account for instance). For those that think that my returns are too good to be true, let me assure you that they ARE true.
As for those who remember that I lost 92% of my original money during the 2008/2009 crash, let me say that DEEP-out-of-the-money naked puts were NOT available during the crash. Had such options been trading, my percentage losses would have been much smaller.
If you or anyone else here is interested in finding out more about my one-of-a-kind program that offers outsized returns with less risk than buying and holding the stock, I can be reached at (213) 222-5547. What do you have to lose by calling?