Firing workers isn't fixing problems

It's a fact of life, for individuals as well as companies, that we tend to keep pursuing strategies that have been successful long after they've stopped working. Pfizer fell victim to exactly that common failing. Its huge sales force wasn't yielding the returns to the company that it had in the past, so in an effort to fix the problem, Pfizer added more sales people.

The job cuts announced by Pfizer CEO Kindler are an effort to reduce that bloat. As Ian Read, president of the company's worldwide pharmaceutical operations, put it when Pfizer announced the cuts, the goal is to take the company back to its 2003 headcount, before the merger with Pharmacia.

But the cuts won't just affect the sales force. About 2,900 jobs will come out of research and development through the closure of three research sites. That's the second reorganization of the company's drug research program in less than two months: Kindler had announced the first overhaul after the company was forced to cancel development of torcetrapib on safety concerns. That drug was designed to be combined with Lipitor to extend the life of the company's blockbuster.

Although Pfizer is cutting research and development staff, it won't be cutting research and development spending, which is set to stay approximately steady at $7.5 billion a year. Good thing too, since CEO Kindler has committed the company to launching four internally developed drugs a year annually by 2011, to go with the launch of two externally acquired drugs a year.

As with Motorola's plan, there's no guarantee that Pfizer's effort will work. Revenue growth in the drug industry as a whole slowed to about 7% a year in 2004-2005, according to Standard & Poor's. That's after a decade of double-digit revenue growth.

And it's not like Pfizer is ramping up research and development spending from nothing, either. The company spent $7.4 billion, or 14.5% of revenue, on research and development in 2005. That's essentially the same as the 2007 budget. Pfizer now has a pipeline of 170 novel drug candidates, but it's tough to predict how many of these will turn into viable drugs and how many will become the kind of big sellers that Pfizer's sales force used to thrive on.

It's safe to say at this point is that Pfizer is, like Motorola, another former great growth stock where growth has become very unpredictable.

Who can pump it up?

If you survey the stock market landscape, you'll find more former predictable growth stocks that now offer the same uncertainty that Pfizer and Motorola do. That, of course means that an investor shouldn't pay the same high price-to-earnings ratio now for the less predictable growth of a Coca-Cola (KO, news, msgs), a Citigroup (C, news, msgs), an Intel (INTC, news, msgs) or a Dell (DELL INC., news, msgs).

And it means that the relatively fewer growth companies still pumping out predictable double-digit growth, such as a Procter & Gamble (PG, news, msgs) or a PepsiCo (PEP, news, msgs), deserve a higher multiple.

The most interesting -- and potentially most profitable -- cases are those once-great predictable growth companies that are now on the cusp. Will a company such as McDonald's (MCD, news, msgs) return to the ranks of those companies able to produce predictable double-digit growth? Should investors think of Cisco Systems (CSCO, news, msgs) as belonging to this category? And is Johnson & Johnson (JNJ, news, msgs) going to defy skeptics and keep pumping out that growth?

Sometimes it feels like the universe of great, predictable growth stocks has become very small indeed. But, fortunately, investors are witnessing the emergence of a new generation of growth stocks in the developing economies of the world. That's a topic for another day, however. Say, in about two weeks.

New developments on past columns

"5 buys for a fourth-quarter rally": There's no place to hide, but a few spots in the supply chain do provide some shelter from the storm. In 2006, the average selling price for a 42-inch LCD television fell by almost 50%, according to iSuppli. That crushed profit margins at the companies that manufacture the sets. Corning (GLW, news, msgs), which supplies the glass for screens to set makers, certainly didn't escape the squeeze on prices as selling price for its glass tumbled in 2006. But the decline was a relatively less punishing 20%, according to Pacific Crest Securities, and that difference was enough to enable Corning to beat Wall Street estimates by 3 cents, or better than 10%, for the December 2006 quarter.

On Jan. 24, the company reported earnings of 31 cents a share, up from a 2 cent a share loss in the fourth quarter of 2005. Revenue climbed by 14%. Corning isn't out of the woods yet, since the first half of 2007 is likely to be weak because of typical seasonal weakness in the first quarter -- when Wall Street is looking for just 7% earnings growth -- and continued pressure on glass and TV set prices. Indeed, the company cut its guidance for the first quarter of the year by a penny and predicted a 10% to 15% drop in display volumes. As of Jan. 31, I'm extending my target price of $28 from June to December 2007. (Full disclosure: I own shares of Corning in my personal portfolio.)

Meet Jim Jubak at The Money Show

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Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that Jubak's Picks recommendations are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jim's new portfolio, Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.

E-mail Jim Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Corning and PepsiCo. He does not own short positions in any stock mentioned in this column.

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