Dow Earnings: Is Big Pharma a Buy?

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U.S. stocks opened higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.35% and 0.31%, respectively, at 10:20 a.m. EDT.

Getting to the bottom of "Pharma Tuesday"
The Dow's two pure-play pharmaceutical companies, Pfizer and Merck , reported quarterly results this morning. Here's how things shook out.

Pfizer beat expectations with adjusted earnings per share of $0.59 versus the $0.55 consensus estimate. Revenue of $12.97 billion was in line with expectations for $13.01 billion. The company reaffirmed its full-year EPS guidance of $2.10 to $2.20.

More interestingly, the company announced that it will split its commercial operations into three parts, two for its branded products and one for generics. That move paves the way for a potential spin-off of the generics business. Chief executive Ian Read continues to reshape Pfizer after completing the divestiture of its nutrition and animal-health activities.

Meanwhile, Merk also beat estimates -- on an adjusted basis -- with earnings of $0.84 per share against $0.83. However, once acquisition and restructuring-related expenses are factored in, that number falls to $0.30 per share -- roughly half the amount it earned in the prior-year period.

In addition, revenue of $11.01 billion came in lower than the Wall Street's $11.22 billion forecast. One of the factors hampering revenue: the loss of allergy and asthma drug Singulair's patent, which produced an 80% year-on-year decline in the drug's revenue to $281 million. Ouch!

With both of these pharma stocks trading at less than 14 times their EPS estimates for the next 12 months and sporting 3%-plus dividend yields, they look very attractive -- on a superficial basis. That isn't to dismiss them entirely; they have attractive qualities. However, these aren't your grandparents' pharmaceutical companies. They're businesses in transition that are finding their place in a shifting technological and regulatory environment. Pfizer and Merck may be worth a look right now, but I wouldn't expect the returns of yesteryear from current levels.

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The article Dow Earnings: Is Big Pharma a Buy? originally appeared on

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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