It has been interesting to see how market commentary seems to have shifted as much as possible away from COVID-related news since the beginning of the year. In one sense, I think that could be a good thing, since there are a lot of issues, economic, political, and otherwise that are worthy of attention. This week the weather has taken front stage, which isn’t at all surprising given an increase in winter storms across the United States that have even affected traditionally more temperate climates in the southern part of the country. The cold snap has been severe enough in those area to leave millions of people without power, water, and heat and forcing them to rely on whatever emergency storage they may have had on hand. Another immediate economic impact of below-freezing temperatures in those areas is dramatically lower oil production out of the Permian Basin, where operations in some cases have been completely shut down as a result.
Along with questions about a new federal stimulus being advanced by Congress to the Senate, seemingly given an increasing sense of urgency from an increase in the latest number of new unemployment claims, the truth is that questions about COVID aren’t going away. While inflections and hospitalizations have begun trending down, one of the questions is whether this is a legitimate sign that vaccination efforts are gaining enough traction to start curbing the spread of the virus, and an early indication that better times are coming. I think that means that a lot of attention is going to continue to be paid to pharmaceutical companies like Pflizer Inc. (PFE). PFE was the first company to gain approval for its vaccine, and along with Moderna’s (MRNA) vaccine, which was the second to be approved, doses have been administered for most of the past two months across the country.
Financially speaking, one bit of positive news for PFE about its vaccine is the Biden administration finalized the purchase of an additional 100 million doses of the vaccine it developed with BioNTech. That will bring in an additional $2 billion of revenue this year, bringing its total expected sales of the vaccine in 2021 to around $15 billion. After accounting for an even split of those proceeds with its partner, analysts are predicting an increase in pre-tax revenue for PFE of about $4.2 billion this year. Let’s also not forget that PFE has a robust pipeline of drugs in other important segments, including oncology that is expected to remain solid as growth in new, emerging drugs should offset declines in known names like Lyrica and Enbrel due to increasing generic competition for those older drugs.
PFE announced last year that they would be spinning the UpJohn segment of their organization into a separate company. This is a declining business that has been dragging down their overall results for some time now. The spinoff was completed in the fourth quarter of 2020, and is generally seen as a positive as PFE is now in a better position for growth. As one of the leading pharmaceutical companies in the industry, PFE boasts a broad portfolio with eight separate drug brands that each account for more than $1 billion in annual sales, but none that contribute more than 11% of total revenue. They also have a large development pipeline, especially as previously observed in oncology drugs that most analysts see strong long-term growth that should offset the effect of increased competition in existing brands as patent protections expire and biosimilar and generic drugs start to take up market share.
Despite the media attention given its COVID vaccine, and an initial bump into early December 2020 that saw the stock peak at around $43, the stock has sharply underperformed over the last two months, declining almost -20% since then to its current price at around $35 as of this writing. Are the company’s fundamentals strong enough to infer that the decline in its stock price now offers a useful, intriguing value? Let’s dive in to 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 $191.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by -23.6%, while revenues declined almost -8%. In the last quarter, earnings slipped nearly -41.67% lower while sales declined by about -3.7%. The company’s margin profile is generally healthy, but is showing the effects of intense investment in rapid COVID investment and distribution at the expense of other products in its pipeline; over the last twelve months, Net Income as a percentage of Revenues was 7.59%, and weakened to 5.08% 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 $12.7 billion in mid-2020 and a little over $13 billion in mid-2019. The current number translates to a Free Cash Flow Yield of 5.4%.
Debt to Equity: PFE’s debt to equity is .76, which is generally considered a conservative number. The company’s balance sheet indicates operating profits should be adequate to service their debt for the time being; cash and liquid assets were about $21.9 billion in the last quarter versus almost $10.3 billion at the beginning 2020, while long-term debt was $49.7 billion in the last quarter versus $29 billion in June of 2018. I’m not sure this is a major red flag, given that the company has been directing a major portion of its focus to COVID-19; but it is worth noting that the real profit opportunity in the drug isn’t in the initial implementation and distribution, even though the company has stated its intention to be able to distribute 100 million doses in the U.S. by 1 billion doses by the end of 2021. The truth is that the first wave of vaccine distribution will likely be done at a loss for the company (reflected by the latest declines in revenues, earnings, and Net Income) in the interest of the greater public good to address the health crisis. Profitability is assumed to come by the ongoing need for a renewed vaccine, in similar fashion to the yearly flu or pneumonia shot that doctors generally recommend for just about everybody. The need for regular booster shots are even more likely given the emergence of new strains of the virus.
Dividend: PFE’s annual divided is $1.56 per share, which translates to a yield of about 4.4% at the stock’s current price. It is also noteworthy that the dividend increased at the beginning of 2020 from $1.52 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 $37 per share. That means that PFE is modestly undervalue right now by about 7%, with its bargain price actually down at around $29.50 per share.
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 red diagonal line traces the stock’s upward trend from a bear market low at around $28 per share to its peak in December a little above $43. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that high, the stock has dropped into a clear, short-term downward trend and is now nearing support at around $33.50 where the 61.8% retracement line sits. Immediate resistance is around the 50% retracement line, at $35.50. A push above $35.50 should have upside to a little above $37 where the 38.2% retracement line waits, while a drop below $33.50 could see the stock drop to about $31.50 before finding next support based on pivot low activity in June of 2020.
Near-term Keys: If you work off of the basis of the stock’s valuation metrics, it’s hard to make a case for the stock right now as a good bargain – even with the expectation of increased distribution for PFE’s COVID vaccine throughout the year. The stock’s downward trend also means that for value investors, it makes sense to wait to see where the stock finds enough support to stabilize the current downward trend before looking for a practical, hopefully more useful entry point. For now, the best bet if you want to work with this stock is to look for short-term trading opportunities dictated by the path and pace of price momentum. If the stock pushes above $35.50, you could consider buying the stock or working with call options, using a bullish target price at around $37.50 to take profits. If the stock drops below $33.50, consider shorting the stock or buying put options, using $31.50 as a useful bearish profit target.