Pfizer Only a Good Hold

We believe Pfizer Inc. (PFE) continues to face an uphill battle in growing its top line given the company's sheer size and lack of a significant pipeline. While near-term earnings growth will come in the form of cost-cutting and share repurchases, the company lacks a catalyst to increase revenues once Lipitor loses patent exclusivity.

We expect the company to look to do a number of significant deals in the pharma and biotech industry in order to build the franchise and invest for the future. We believe there s currently little downside price risk given the valuation and rate the shares a Hold with a $21 price target.

Given our current forecast, we expect Pfizer will only be able to manage 2% earnings growth through 2012. This is paltry, at best, especially given other names in the large-cap pharmaceutical space that offer growth in the double-digits.

The wildcard with Pfizer and part of the reason for its cheap valuation, however, is the question of what they will do with their mountain of cash.

We've been critical of the management relative to their historically poor track record of getting high-profile pipeline candidates to market and the fact that most of the $17 billion earmarked for acquisitions is still sitting on their balance sheet earning money market returns.

We do believe, however, that Pfizer's management has a very keen eye on 2010 when Lipitor goes off patent outside of the U.S. We expect that, lacking a large mega-cap acquisition, they will be looking for a significant number of smaller ones to make up for the loss of exclusivity of their mega-blockbuster. While we're not convinced that Pfizer's strategy is enough to make the shares attractive from a long-term perspective, we believe there's little risk in holding the shares with a shorter-term focus.

Tractor Supply Surprises

Tractor Supply (TSCO) reported better-than-expected results for the second quarter, beating the consensus estimate by $0.05. Management reiterated its sales and EPS guidance for full-year 2008. We are increasing our sales and EPS estimates for 2008 and 2009.

Despite the difficult macro conditions - including higher food and energy prices and weak consumer confidence - Tractor Supply's focus on sales growth and cost controls is enabling the company to deliver solid results. We think the stock is still cheap and represents a buying opportunity at these levels. We maintain our Buy rating and increase our target price from $37 to $39, which is about 15x our 2008 EPS estimate.

In our view, Tractor Supply's unique retail concept, store locations, and target customer will help the company through the difficult macro conditions. Tractor Supply stores carry a wide selection of high quality, nationally recognized, name brand merchandise. It is a one-stop shop for farmers, ranchers, and rural landowners, offering a wide range of products from livestock and pet care products, to work clothing for the entire family. The company also markets a growing list of products under its private-label programs.