A Chance to Get Pfizer at a Discount By STEVEN M. SEARS

A Chance to Get Pfizer at a Discount
By STEVEN M. SEARS | MORE ARTICLES BY AUTHOR

Selling puts on the drug maker's shares could be a cost-effective way of easing into the beaten-down stock.


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NO MATTER HOW BAD THINGS get with the economy, people will still be popping pills to control cholesterol, blood pressure and all matter of genetic and lifestyle ailments.

This thinking has more or less perpetually defined the pharmaceutical sector, and deserves some consideration now that Goldman Sachs has today named Pfizer (ticker: PFE) as one of the firm's best stock ideas.

The battered and bruised stock was added to Goldman's Conviction Buy List.

Even at $12.50 a share, and trading at just 10 times earnings, it's hard to feel good about buying a stock that has lost 67% of its value in the past five years. To put that decline in perspective, consider that Johnson & Johnson (JNJ) is down about 7% during the same period.

But on an absolute basis, $12.50 is not a lot of money to spend on a speculation. Investors who are comfortable with options can potentially buy Pfizer stock at an even lower price. Here's how, courtesy of Goldman derivatives strategists John Marshall and Stuart Kaiser.

The Goldman strategists recommend selling September 11 puts to collect $1.03 in exchange for committing to buy shares at a $9.97 effective entry price that is 20% below the current price of $12.50, they told clients in an early morning note.

If you want to speculate on Pfizer, this is a wise and cost-effective way to do so. Put sellers will benefit from Pfizer's high level of implied volatility. If implied volatility fell seven points to average levels versus the pharmaceutical sector, Marshall and Kaiser estimate the September 11 put would decline by 25%.

To be sure, it is important to recognize that selling puts is not tantamount to buying a stock. When you sell puts, you are committing yourself to buy the stock should the price fall below the put's strike price. If the stock advances, rather than declines, you don't get to buy the stock, but you can keep the money, otherwise known as a "premium," for selling the put.

Goldman pharmaceutical analyst Jami Rubin believes Pfizer's "large valuation discount" will become apparent as investors incorporate Wyeth's (WYE) robust product lineup into earnings estimates.

In January, Pfizer agreed to buy Wyeth, a stock that had hung around $40 a share for a long time on concerns about its ability to monetize its new product pipeline. If Pfizer's management successfully integrates Wyeth, cutting costs and maximizing revenue, while battling against aggressively litigious generic-drug makers like Teva Pharmaceutical Industries (TEVA), the new company could be a dominant force in the pharmaceutical industry.

Of course, if Pfizer makes any significant missteps during the integration, or has any product setbacks, the Wyeth merger could backfire as already nervous investors could start to seriously question the abilities, or lack thereof, of Pfizer's management team.

Goldman believes synergies and removal of deal overhang likely will reduce uncertainty about Pfizer's stock. The deal is scheduled to close in the fall, and cost savings and financing plans will be announced.

"We expect these announcements to reduce uncertainty and ease Pfizer options prices," Marshall and Kaiser said. "Pfizer may announce a bond offering in the second quarter to offset some of the $50 billion in bridge financing, which poses a headline risk for shares."

They are confident about the bond offering since more than $40 billion in debt has been issued year-to-date in the health-care sector, and because Pfizer has a solid balance sheet and free cash flow position.

Nothing is without risk. If Pfizer's risks are acceptable to you, selling puts as a way to buy the stock at a lower price makes an extraordinary amount of sense