Tuesday, December 25, 2012

Why I Own PFE

PFE is the largest pharmaceutical company in the world with $70 B in annual sales. I have owned PFE (off and on) since 2005. Back then stock was depressed because of the headlines regarding the patent cliff of 2010's. The patent cliff is a series of major patent expiration starting in 2010 which was supposed to dramatically reduce the company's sales. The company's sales are tied to around a dozen blockbuster drugs. Here I define blockbuster drugs as those with over a billion annual sales. As an example, Lipitor (a cholesterol drug) was a $10 B drug until its patent expiration in the US in 2011.

Just in 2010-2012, PFE has lost exclusivity in six billion dollar drugs (Lipitor, Geodon, Aricept, Viagra, Xalatan, Detrol). However, PFE is not alone, the entire drug industry is going through the patent cliff together. And I feel the patent cliff headlines have made all pharmaceuticals undervalued. PFE has tackled the patent cliff with consolidation and cost reductions. In 2009 they bought Wyeth, another major pharmaceutical company. This merger was to diversify PFE's sales, and mitigate the patent expirations. And fortunately, the patent expirations will start tapering off, with no major expirations in 2013 and only one (Celebrex) in 2014.

PFE now has almost $70B revenue. The stock trades at $25 and generates $2.20 per share of free cash flow. The stock's dividend yield is 4%. I bought most of my current shares below $20 during the financial crises of 2008-2009. When then as the market tanked, I was looking to buy stocks because of the overall market valuation. Which particular stock didn't matter so much as long as it was not at risk of bankruptcy. Defensive sectors such as health care fit this bill.

From the depths of the financial crises to now, PFE has roughly kept pace with the overall market. Now the PFE stock is a decent investment based on the cash flow alone. The company's R&D pipeline is said to be quite deep. Future products from R&D should at least maintain their cash flow. Furthermore, as the Wyeth merger matures, the synergies will add further to cash flow.

I don't delve into the specifics of the R&D aspects of PFE. The pharmaceutical industry is very leading edge like high tech. And I feel my analysis or opinion will add little to the general knowledge. Instead, I just admit the specifics of PFE's future is unknowable, but the market dynamics are very much in the industry's favour. The pharmaceuticals are a $1 trillion industry worldwide. As countries look to improve living standards, a key goal would be to improve health standards while reining in costs. That means the focus should not be in churning out more and more doctors, who are highly paid, but in using technology to make cheap and decent health care to the masses.

In the US, for example, the coming health care bill called Obamacare will increase health coverage for tens of millions of people. To do so, cost per person will have to go down, so the industry will do anything it can to save money. That appears to be bad for the managed care organizations (MCOs). I disagree. The MCOs cut of the health care bill is small. Cutting MCO profits will do little to dent the overall rising costs. Instead, if MCOs can improve efficiencies in delivery and trim waste, then they will reduce the overall health care cost and make a good profit at the same time.

And as for pharmaceuticals, the increase in people with coverage means more demand for medicine. More demand means more money for the R&D of new medicines. Pharma companies are driven by the profit motive. If governments trim costs by starving them of profits, then they simply cannot afford research.

So overall, the entire health care industry is a large portion of the world economy with lots of room for growth. And I am a low-risk diversified investor. That is the main reason I have held two large cap health care stocks for a while now: PFE and Wellpoint.

Saturday, December 8, 2012

GLBS Quarterly Update

Globus Maritime (GLBS) is a microcap shipping company headquartered in Greece. The company trades on NASDAQ. The company reported a loss of $0.8M for the 3rd quarter ended Sept 30.

I bought GLBS four months ago as an experiement in self-reliant small cap investing. I looked for cheaply valued small cap stocks. For the most part small caps - which I define as less than 1 billion in market cap - have no analyst coverage and very little news coverage. I used some screeners, mostly from Morningstar to get a list of candidates. Then I whittled my list down to 2 stocks: McRae Industries and GLBS. I don't regret my decision on those two given what I knew at the time. Ostensibly, McRae is doing decent while GLBS is down a hefty 33%.

Clearly, GLBS is down 33% because of two consecutive losing quarters. The two quarters' losses were small however, only a total of $3.2M of which about half was due to a previous year's receivable write-down. Compare that with 140M of equity. A long term investor should expect this kind of results in the highly volatile shipping business. The Baltic Dry Index is now hovering at 1000, which is a big drop from a high of more than 10,000 just before the financial crises of 2008.

Today, the world has gone a long way towards recovery from 2008, but the shipping sector is suffering from a from a glut of ships. Therefore GLBS management is hardly to blame for the weak results. As a part time investor working in an unfamiliar sector, I am the first to admit I don't know exactly why there is a glut of ships. But I believe it is at least in part due to unbridled spending just before the financial crises.

The glut effect caused the average daily rate per ship to be $10K for GLBS. Breakeven is around $12K. The GLBS presentation mentioned that the overbuild peaked in 2008 and is supposed to bring supply back to normal in the coming years. I really hate to rely on company supplied industry/market analysis but I make an exception now.

GLBS appears to be one of those companies that is honest and patient. Waiting for a weak moment to build up assets on the cheap. GLBS is extremely undervalued at a very depressed time for its industry. The critical question is whether GLBS is too good to pass up, or is the industry so hopeless that no company in the industry is worth it. Each GLBS share has about $13 of equity but the last close was $1.86 and its recent low was $1.63! At the current price I will hold off on buying more shares until the next quarterly. But if it falls down to around $15 I will seriously considering increasing my current position by 50%.

You can go here to see all my sources for this article. Any thoughts? Please comment!