$17 Billion In Free Cash Flow/Year And Largest Distribution Network In The World Makes Pfizer (PFE) A Top Investment
March 3, 2010 - The Wall Street Transcript has just published High-Yield Investing Strategies Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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BRIAN BOYLE, Founder and CEO of Boyle Capital, is the firm's Chief Investment Officer. He graduated summa cum laude from the University of Northern Iowa with a BA degree in Finance. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the Iowa Society of Financial Analysts.
TWST: Would you tell us about some of the stocks that you feel are representative of your process and the reasons why you were attracted to them?
Mr. Boyle: One that we find very attractive today is the pharmaceutical company Pfizer (PFE). Pfizer trades for around $15 a share right now. If you go back 10 years ago to late 1999, Pfizer was trading at $50, nearly 60 times earnings. Well, clearly it was overvalued at 60 times earnings and it should come as no surprise that the stock did horribly. But look at the fundamentals. Sales per share are up over 70% since then, cash flow per share is up nearly 200% and the dividend is up over 100%. So whereas 10 years ago at 60 times earnings it was an unattractive investment, at 6 and 7 times earnings today, it's extremely attractive in our opinion.
Take a look at what you are getting today with Pfizer. You are getting an investment grade company with $17 billion in annual free cash flow, the largest distribution network in the world and you are getting paid a dividend in excess of 4% annually. What's more, they announced earlier in the year the acquisition of Wyeth (WYE), which will fill a big hole in revenues that was set to happen when Lipitor went off patent. Still not convinced?
They also have hundreds of drugs in their pipeline at various stages and who knows what comes of that, but at today's prices, you don't have to worry as we don't think you are paying for that. In fact, at today's levels, Pfizer is trading for less than what the net present value would be if they put all of their patented drugs into runoff. We didn't even mention mature products or generics, which Pfizer has made a huge push into and is I believe already the sixth or seventh largest generic company in the world. There is simply of ton of value in Pfizer in our opinion, which is why it is one of our largest positions.
TWST: Would you tell us more about Fairfax?
Mr. Boyle: Fairfax, as I mentioned, is an insurance company based out of Toronto. Prem Watsa, the CEO of the company, is one of the best investment minds on the planet and clearly is aligned with investors, having 99% of his net worth in the company. Fairfax stands for fair and friendly acquisitions and since 1985 Watsa has primarily grown the company from nothing by making a number of strategic acquisitions in the property and casualty space. While the ride has been anything but smooth, very few other companies have matched the success Fairfax has been able to achieve. Since 1985, book value has grown at about 25.5% annually, with the stock returning about 23% a year over the same time. So they've done an absolutely remarkable job of growing the company over the past 23 years.
As I mentioned earlier, in 2008 they grew their book value in excess of 20% and Fairfax was the top performing property and casualty insurance company in North America. By the way, that is no small feat when you consider the likes of a Berkshire Hathaway saw book value go down roughly 10% last year. When you buy a company like Fairfax you are really buying into their investment management arm, Hamblin Watsa. Hamblin Watsa, which runs the investment portfolio at Fairfax and its subsidiaries, has put together outstanding investment results over the past five, 10 and 15 years and is the main reason their book value was up last year. Worried about a storm that very few saw coming and even fewer profited from, Fairfax purchased credit default swaps as early as 2005. In late 2007 and 2008 when the storms hit, Fairfax's credit default swaps yielded billions in profits.
TWST: Are there any other companies from either portfolio that you find attractive at this time?
Mr. Boyle: One last one I would like to mention is a company called Contango Oil & Gas (MCF). Contango Oil & Gas is a smaller company. As I said, we have a much larger allocation to large cap companies than we've had historically, but one smaller company that we do have in the portfolio is Contango Oil & Gas. Contango was started in 1998 by a gentleman named Ken Peak who is the CEO and Chairman. They have only six employees. They are based out of Houston, Texas, and essentially they are involved in the discovery and exploration of natural gas and oil. Ken Peak owns roughly 19% of the company and we think he is just a tremendous capital allocator.
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