Wondering About Wyeth (WYE), a Major Pharma

At the StockCentral website, Gene Rooks wrote: “I am also interested in this company for its potential in the Alzheimer’s research paying off. Accordingly, I used higher estimated growth percentages than the history warranted.”

A SSG for Wyeth (WYE) is unusually difficult because data from NAIC-OPS and from Hemscott paint two different pictures of the company’s growth.

- WYE’s historical EPS for the last 5 years with NAIC-OPS data, which Gene used, was 11.4% while its 5 year EPS ave with Hemscott data was completely different at -10.2%. To understand the OPS picture, we can look at Value Line which uses almost identical data for WYE. VL explained how the company’s EPS was normalized: VL excluded non-recurring amounts in each of the last 10 years and non-recurring losses occurred in 9 of the years [that's alotta recurring non-recurring losses (grin)]. I believe Hemscott and OPS used different judgments to normalize their respective EPS data and that those judgments are nowheres explained;

- An SSG with Hemscott data looks ugly with jagged and criss-crossing lines for EPS and Pre-Tax Profit in Section 1 and offers little if any guidance for forecasting the future. Even though Take Stock Online uses the same Hemscott data, it reports an even worse history with EPS growing an inexplicable -14.67% for the last 5 years (not -10.2%)

[The two sources for subscription SSG data at a modest price are NAIC at Better Investing.org and StockCentral.com. NAIC provides OPS/S&P data while StockCentral provides Hemscott data. Subscribers to StockCentral also get access to TakeStock, an online stock analysis program.];

- Analysts are estimating between 8-9% EPS growth for the next 5 years with Reuters the highest at 9.23%, but with a large 3.63% Standard Deviation indicating wide variation among those 10 analysts. The lowest estimate was by First Call and OPS/S&P with 8.00% EPS growth. Take Stock Online, on the other hand, is estimating an incredibly low -0.30% EPS growth for the next 5 years which seems way off-base;

- Gene’s SSG estimated EPS growth at 11.4% and is higher than all the analysts. Her Forecast High Price at $96.10 is substantially higher than than VL’s estimated $50-70 High Price, some 37% or $26 per share higher;

- Gene got a SSG Buy with a 4.3 Upside/Downside Ratio and a 15.3% Total Return only because of her high estimated EPS growth. With a 9.23% estimated EPS growth rate (the Reuters forecast, highest of all the analysts), her SSG results in a 13.0% TR which does not satisfy the minimum 15% Buy criteria. With a 5.6% growth rate (Reuters less one Standard Deviation), the TR becomes 9.3%;

- Value Line assigns WYE an A+ for Financial Strength and a 95% Earnings Predictability rating along with an EPS estimate of 9.00% for the next 3-5 years. VL’s Safety Rating, which analysts often use as a measure of Quality, is 2 out of 5 (with 1 the safest). S&P’s Stock Report gives WYE a Quality Rating of B (four grades are higher, 3 lower), an Investability Quotient of 96%, and 4 out of 5 stars. Morningstar reports 3 Stars out of 5 and a mediocre Stewardship Grade of C.

- Take Stock gives WYE an “Unacceptable” Quality score of 2.20, with “Unacceptable” ranging from 0 to 3.30. Take Stock’s Quality measure is based on growth as well as efficiency (PTPM and ROE) and WYE’s poor score stems solely from its poor EPS growth with Hemscott data. S&P’s Quality Rating of B is also based on growth and stability of earnings, but uses different data;

- Value Line, Morningstar and S&P all discuss drugs under development, but none mention anything for Alzheimer’s. S&P does say that several thousand lawsuits are pending over WYE’s drugs for hormone replacement therapy and that the company has paid out some $16.7 Billion to settle lawsuits involving its fen-phen diet drug with $4 Billion more (and an end to that litigation) on schedule.

CONCLUSION: the data is a muddle, the SSG is a BUY only with very optimistic assumptions about the next 5 years, and lawsuits seeking money damages may continue to cloud WYE’s future for years to come. I’m not interested and, if you still are, I recommend caution.

Armin