As recently as a few months ago, a lot of signs about the global pandemic seemed to suggest that the worst of the worst was over, and we could all finally begin to put COVID-19 concerns and commentary in the rear view. As contagious variants of the virus have emerged, however, it has become more and more apparent that, while economic activity has been healthy as restrictions have eased and consumers have been able to re-engage in many of the activities that were shuttered or limited during much of 2020, COVID is going to continue to be a concern, and an ongoing issue well in 2022.
I think the risk these variants continue to present means that research into the long-term efficacy of current vaccines will be an ongoing concern; it has also translated to into a lot of scrutiny not only about how effective initial vaccinations are, but also the value of booster shots months after the initial doses have been received. For pharmaceutical companies like Pflizer Inc. (PFE), that means that their vaccines are likely to remain relevant well into 2022 and possibly beyond. After accounting for an even split of those proceeds with its partner, PFE predicted their COVID vaccine – the first to be approved in the U.S. – would contribute $15 billion in sales for 2021 in their first quarter earnings report. More recent reports have put the actual numbers even higher than that; for PFE’s second fiscal quarter, COVID sales were 41% of total sales, amounting to a reported $7.8 billion in that period alone. 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.
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 (not counting its COVID vaccine). They also have a large development pipeline, especially as previously observed in oncology drugs where 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.
The stock saw a big push in the early part of 2021, moving from a low in March of this year at around $33 to a peak in mid-August at around $52 per share. From that high, the stock has faded back despite strong gains in the company’s fundamental strength and intrinsic value. I attribute most of the decline to the stock’s current price at around $42 to the nationwide rise during the summer of infections and hospitalizations tied to the Delta coronavirus variant, and that remain high now in the U.S. as health systems are stretched to the limit and government officials and health leaders have struggled to motivate the public to get vaccinated in large enough numbers to blunt the crisis and mitigate the effects of the next variants in line. At the same time, for a value investor, the stock’s decline in price creates an intriguing opportunity to start taking the stock even more seriously as a useful long-term investor. Let’s dive in to the numbers so you can decide for yourself whether PFE is a stock to which you should be paying more attention.
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 $232.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 37%, while revenues rose nearly 61%. In the last quarter, earnings rose a little over 15% while sales were about 30% higher. The company’s margin profile isn’t just healthy, but robust and gaining strength; over the last twelve months, Net Income as a percentage of Revenues was 23.8%, and strengthened to 29.31% in the last quarter.
Free Cash Flow: PFE’s free cash flow is very healthy at $21.1 billion over the last twelve months. That also marks an improvement from $12.7 billion in mid-2020, and $13.4 billion in the quarter prior. The current number translates to a Free Cash Flow Yield of 9.09%.
Debt to Equity: PFE’s debt to equity is .50, which is a conservative number. The company’s balance sheet indicates operating profits should be more than adequate to service their debt; cash and liquid assets were about $21.7 billion in the last quarter versus $12.2 billion six months ago, while long-term debt was $35.3 billion in the last quarter – down from $49.7 billion at the beginning of 2021. I don’t see the high debt number is a major red flag, given that the company has been directing a major portion of its focus to COVID-19 and to debt reduction. It is worth noting that the real profit opportunity in the vaccine isn’t in the initial implementation and distribution. Profitability is coming, as anticipated by management and many industry analysts, from the ongoing need for boosters, in similar fashion to the yearly flu or pneumonia booster that doctors generally recommend for just about everybody.
Dividend: PFE’s annual divided is $1.56 per share, which translates to a yield of about 3.76% 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 at nearly $48 per share. That means that PFE is undervalue right now by about 15%, and a compelling bargain price at around $38 per share. It is also worth noting that in the last quarter, this same analysis yielded a fair value target price at around $34 per share, making the current increase very interesting.
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 red diagonal line traces the stock’s upward trend from a 52-week low at around $33 per share in March of this year to its peak in August at around $52. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has dropped sharply off of that August high, and is current sitting a little below the 50% retracement line at around $42 per share. The stock could be trying to stabilize around that level, but for now I’m putting current support at around $40.50 where the 61.8% retracement rests, with immediate resistance expected at around $43. A push above $43 should have near-term upside to about $45, but the stock would need to break above that level (in line with the 38.2% retracement line) to mark a reversal of the stock’s current downward trend since August. In that case, near-term upside could sit somewhere between $48 and $50, based on very temporary pivots that occurred in August. A drop below $40.50 should have limited downside to about $39 before finding next support, with additional downside to about $37.50 if bearish momentum picks up.
Near-term Keys: With the sizable improvements in PFE’s balance sheet and operating strength, it isn’t too surprising to say that the stock’s current drop has really only made the stock more interesting from a valuation standpoint, with enough long-term upside potential to make a value-based investment worth considering. If you prefer to focus on short-term trading strategies, you could use a push above $43 as a signal to consider buying the stock or working with call options, using a bullish near-term target price at around $45 to take profits. Downside is more limited, but you could also use a drop below support at $40.50 as an opportunity to think about shorting the stock or buying put options, using $39 as a very quick-hit, bearish target and $37.50 if selling activity increases.