Don't Hate Pfizer's Tax Inversion

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Finally. The moment we've all been waiting for. A match made in heaven like Gene Simmons and Shannon Tweed. Viagra and Botox are officially together under the same thatch roof. That's right folks, Pfizer ( PFE ) and Allergan ( AGN ) are merging, with Pfizer taking over and reincorporating in Ireland in the largest tax evasion, excuse me, inversion in history.

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The deal, worth $155 billion will create the world's biggest drug maker by sales. Pfizer expects the combined firm to have an adjusted tax rate between 17 and 18%, well below its current 25% rate. The deal comes in at a 30% premium to Allergan's closing price when the deal was first rumored on October 28 th . After the official news broke today, shares of both companies were off a little more than one percent.

Come on man, there's got to be a way I can take advantage of this tax loop hole too. What I gotta do? Marry an Irish chick. For 8% off my taxes, I'll holler at Miss O'Leary. Heck, I like Guinness. Bangers and Mash. Soccer matches. Sons of Anarchy. Lucky Charms. Some people are all up at arms on this deal, saying it's unfair and it's taking tax revenues away from the US. Well, you're right. It is. But don't hate the player, hate the game. You can't set up an incentive structure that encourages companies like Pfizer to do inversions, then get mad at them when they take advantage. You want to stop companies from doing inversions? Make it cheaper for them to pay taxes here in the US.

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Here's a simple math lesson I'd like everyone to pass along. 17% of $10 billion is a lot more than 25% of zero. Keep on incenting companies to go overseas through inversions and this is what's going to happen. Pfizer says the deal will be neutral to EPS in 2017, add a little in 2018, but provide a 10% increase in 2019. Pfizer also announced it expects to buy back $5 billion in shares in the first half of next year as part of an accelerated buyback program. The deal will result in a company that does about $63 billion in sales. That enough drug business to make El Chapo blush.

Heading into the deal, Pfizer was a Zacks Rank #3 (Hold) in an industry that ranked in the Top 19% of our Zacks Industry Rank. Allergan was a Zacks Rank #4 (Sell). I guess adding Allergan is one way for Pfizer to boost EPS down the road, but investors will have to be patient as they wait for the benefit to show up. If you're looking for a stock in the same industry to look at, try Zacks Rank #1 (Strong Buy) Amphastar Pharma ( AMPH ). Coming off a 13 cent beat on EPS last quarter, the Zacks Consensus estimate for the current year has pushed up from a 55 cent loss to a 33 cent loss. That bullish revision history is a big reason for the Zacks Rank.

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PFIZER INC (PFE): Free Stock Analysis Report

ALLERGAN PLC (AGN): Free Stock Analysis Report

AMPHASTAR PHARM (AMPH): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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