As North America, and most of the world starts to move from broadly implemented lockdown and shelter-in-place mandates to gradually easing restrictions, I think it’s pretty normal to see corporate managers, market analysts, and talking heads commonly talking about the need for a COVID-19 vaccine to really understand the point where things can actually begin to “return to normal” – at least, by pre-coronavirus standards.
Over the last couple of weeks I’ve been interested to see reports of major pharmaceutical companies starting to move development of what many hope prove to be useful vaccines into initial clinical trial stages in certain parts of the world. This week, Pfizer Inc. (PFE) joined the fray, announced the first doses in a U.S. study of four potential vaccines they are working on with BioNTech, with plans to expand the trial to sites throughout the U.S. The hope is to have safety and immune response data available by the fall, with the final candidate going into deeper testing at that point. This timeline identifies what I think is both an impressive leap forward in the biotech world, as well as the reality of what the market and we as investors and consumers need to recognize.
First let’s talk about amazing. The traditional process to fully develop, test, and get approval for broad-based distribution of vaccines has historically taken years of research, trial and error and work. In the world of COVID-19, historical norms are being shattered as scientists turn all of their attention, skill, knowledge and innovative expertise to bear on the pandemic, with indications that governments are looking for reasons to provide emergency approval to clear regulatory hurdles that usually extend the process even further. That is remarkable, suggesting that the process to actual, useful vaccines could take about a year, shattering every kind of historical record of previous groundbreaking vaccine implementation, including smallpox and polio.
The reality, however is that as amazing as that is, the most optimistic estimates about a vaccine breakthrough are uniformly looking into early 2021 before they can be made available to the public on even a limited basis, and later next year, or even 2022 before production can be increased sufficiently to make it available throughout the world. That means that coronavirus is going to be a regular part of the world we live in, which means that even as government-imposed measures to limit the spread of the virus may ease, it will be the responsibility of each individual to take the right steps to protect themselves and the ones they love. Even then, infections will continue, and the death toll will rise. That’s a pretty gloomy outlook, I know, but it means that even as businesses reopen and steps are gradually taken to restart economies across the globe, a “return to normal” as we remember it is still a long way away. That reality should inform the investing decisions we make, even as we hope for the best.
I also think that, as we look for smart places to put our money to work, the pharmaceutical space is going to remain interesting, as much for the work they’re doing to develop antiviral treatments and vaccines, but also to continue to support medical needs outside of COVID-19. Other diseases aren’t going away, and patients who have continued to struggle with non-coronavirus concerns are still going to need to be treated. If anything, that means the relevance and need for what the companies in this industry are doing is going to remain at the forefront of the world’s, and therefore the market’s attention.
PFE is a very interesting company, not just because of their work on a COVID-19 vaccine. PFE has a broad-based portfolio of well-known, productive brands and that also puts a big premium on continuous innovation. Patent laws and rights don’t extend into perpetuity, which means that while a single, successful drug may give a company an edge on its competitors, that will usually only last so long. For PFE, a recent example is Celebrex, a nonsteroidal anti-inflammatory drug that treats arthritis, menstrual and other sorts of pain. When first introduced, it dominated the market, with sales in 2013 that were nearly $3 billion for that single drug alone. Once the patent on the drug expired in 2014, however other companies, including generic drug developers were able to start competing on equal ground, which meant that sales on the drug started dropping, to under $700 million in the last year. PFE understands this reality, however, which why they do a good job of maintaining a consistent portfolio of currently available drugs that each represent no more than 11% of the company’s total revenues per year. They also work hard to keep a continuous pipeline in place of new drugs coming to market to replace the old ones that are becoming obsolete either for competitive or developmental reasons.
All of that makes PFE an interesting company to pay attention to; but the real question is whether this is a stock that you should consider using for an investment right now? It bottomed with the rest of the market in March at a bearish, multiyear low around $28. Since then, the stock has rebounded strongly, establishing a short-term upward trend that now has the stock more than 38% above that extreme low. With a broad set of fundamental strengths working in their favor, a growth-oriented investor would be tempted to buy and hold this stock right now; but it is also a good value? Let’s find out.
Fundamental and Value Profile
Pfizer Inc. (Pfizer) is a research-based global biopharmaceutical company. The Company is engaged in the discovery, development and manufacture of healthcare products. Its global portfolio includes medicines and vaccines, as well as consumer healthcare products. The Company manages its commercial operations through two business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). IH focuses on developing and commercializing medicines and vaccines, as well as products for consumer healthcare. IH therapeutic areas include internal medicine, vaccines, oncology, inflammation and immunology, rare diseases and consumer healthcare. EH includes legacy brands, branded generics, generic sterile injectable products, biosimilars and infusion systems. EH also includes a research and development (R&D) organization, as well as its contract manufacturing business. Its brands include Prevnar 13, Xeljanz, Eliquis, Lipitor, Celebrex, Pristiq and Viagra. PFE has a current market cap of $215.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by -5.9%, while revenues declined -8.3%. In the last quarter, earnings grew nearly 45.5% while sales dropped about -5.2%. The company’s margin profile is very healthy; over the last twelve months, Net Income as a percentage of Revenues was 31.17%, declining somewhat to 28.28% in the last quarter.
Free Cash Flow: PFE’s free cash flow is healthy at $10.4 billion over the last twelve months. That does mark a decline from a little over $13 billion about year ago, and translates to a Free Cash Flow Yield of 4.87%.
Debt to Equity: PFE’s debt to equity is .57, which is generally considered a conservative number. The company’s balance sheet indicates operating profits should be adequate to service their debt, but it also indicates the company’s liquidity is decreasing – cash and liquid assets were about $9.8 billion in the last quarter versus almost $19 billion at the beginning 2019 – while debt has increased. Long-term debt was $35.9 billion in the last quarter versus $29 billion in June of 2018.
Dividend: PFE’s annual divided is $1.52 per share, which translates to a yield of about 3.95% at the stock’s current price. It is also noteworthy that the dividend was increased at the beginning of the year from $1.44 per share, which is a useful indication of management’s confidence in their approach.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $30.36 per share. That means that PFE is currently overvalued by about -22%, with its bargain price actually down at around $24 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The stock’s upward trend from mid-March to now is pretty easy to see, with a steady rise that pushed the stock above the 61.8% retracement line to a peak at about $39 per share. The stock is right at that level right now, with the next immediate resistance after $39 at about $41, and additional upside to about $42.50 if bullish momentum continues. If PFE drops below $38, which is now support as shown by the 61.8% retracement line, the stock could fall quickly to about $36, or even to about $34, which is inline with the 38.2% retracement line.
Near-term Keys: If you work off of the basis of the stock’s valuation metrics, there really isn’t any way to say that the stock fits any kind of value definition. It is possible, of course, that PFE could push higher, especially if enthusiasm about the prospects for a vaccine keep pushing the market higher. That means that the best opportunities with this stock lie with short-term trading methods. If the stock can push above resistance at $39, you could consider buying the stock or working with call options, looking for an exit point anywhere between $41 and $42.50. If PFE drops below $38, consider shorting the stock or working with put options, using $36 to $34 as useful profit targets on a bearish trade.