Over the last year, the pandemic has consistently defied attempts to look past its effects and global impact and to a still-hoped-for “return to normal.” Variants of the virus sparked multiple infection waves through 2021 that kept hospitalizations high and strained the health care system in general. As 2022 started, some of those effects appear to have tapered enough that the market began to shift its focus to questions about the pace of inflation and the resulting response it would necessitate in monetary policy.
As we start the last month of the first quarter of 2022, some of those start-of-the-year questions, both about the pandemic and about interest rates – seem to have been made frivolous and irrelevant in the wake of the conflict in Ukraine. That development, and the immediate, worldwide response to condemn Russia’s aggression and provide useful support to Ukrainian forces and its citizens have, not surprisingly shifted the commentary and focus to that part of the world. That includes economic sanctions imposed on Russia, its banks, and its power brokers that are aimed to cripple the Russian economy.
While news and global attention is focused on Ukraine, declining infections don’t necessarily mean that the pandemic is over. The risk of new variants can’t be dismissed, which I believe means that research into the long-term efficacy of current vaccines will be an ongoing concern, with continued emphasis on encouraging vaccinations and booster shots. The good news is that for the nRNA vaccines available in the U.S., updates to vaccines, if needed, are easier and less time-consuming than for other vaccine types.
For pharmaceutical companies like Pflizer Inc. (PFE) that have led the global effort to development, deliver and administer vaccines around the globe, I think vaccines will remain relevant throughout this year and likely beyond. After accounting for an even split of those proceeds with its partner, PFE predicted their COVID mRNA vaccine – the first to be approved in the U.S. – would contribute $15 billion in sales for 2021 in their first quarter earnings report. The actual numbers came in even better; for PFE’s second fiscal quarter, COVID sales were 41% of total sales, amounting to a reported $7.8 billion in that period alone.
Even more appropriate to what all hope becomes and endemic-phase condition, is the fact that vaccines are just one part of a diversified pharmaceutical company’s development pipeline. 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.
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 14% of total revenue (not counting its COVID vaccine). They also have a large development pipeline, especially as already mentioned 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.
PFE’s stock price enjoyed a strong upward trend throughout the past year, rising from around $30 in March 2021 to a mid-December peak at close to $62. From that peak, the stock has dropped into a clear downward trend, sitting around $47 as of this writing as broader market uncertainty has shifted overall momentum to the bearish side. That momentum says nothing, however about the company’s overall strengths, which include healthy cash flow and a very strong balance sheet. Could that mean that the stock also offers a useful value-based opportunity?
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 $263.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 157%, while revenues grew by 104%. In the last quarter, earnings declined almost -19.4% while sales a little over -1% lower. The company’s margin profile is healthy, but is showing weakness in the last quarter; over the last twelve months, Net Income as a percentage of Revenues was 26.97%, but weakened to 14.36% in the last quarter.
Free Cash Flow: PFE’s free cash flow is very strong, at nearly $29.9 billion over the last twelve months. That also marks an improvement from $13.4 billion a year ago, and $21.1 billion two quarters ago. The current number translates to a Free Cash Flow Yield of 11.15%.
Debt to Equity: PFE’s debt to equity is .536, which is a conservative number. The company’s balance sheet indicates that even with the recent dip in Net Income, operating profits should be more than adequate to service their debt, while the company’s liquidity has also seen big improvements to provide additional flexibility. Cash and liquid assets were about $31 billion in the last quarter versus $21.7 billion six months ago, while long-term debt was $36.2 billion in the last quarter – down from $49.7 billion at the beginning of 2021. I don’t see the high debt number as 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 wasn’t seen in the initial implementation and distribution. Profitability comes, 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 $1.60 per share, and which translates to a yield of about 3.41% at the stock’s current price. It is also noteworthy that the dividend increased at the beginning of 2020 from $1.52 per share, and from $1.56 two quarters ago, and which I think provides 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 $62 per share. That means that PFE is undervalued right now by about 31%. It should also be noted that prior to the latest earnings report, this same analysis yielded a fair value target at around $67.
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 last year to its peak in December at around $62. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s new downward trend is clear and is about to move into an intermediate time frame, which suggests that bearish momentum could continue for the time being. Current support can be seen at the stock’s last pivot low, at around $45 and just a little above the 61.8% retracement line, with immediate resistance expected at around $48.50 and a little above the 50% retracement line. A push above $48.50 should have near-term upside to about $51 where the 38.2% retracement line sits, while a drop below $45, to $44 could have downside to about $40 before finding next support.
Near-term Keys: PFE’s balance sheet has nearly “fortress”-level strength, with robust free cash flow to provide additional stability and growth potential. The last quarter’s dip in Net Income could be a temporary, cyclical movement tied to declines infections that may be reducing the sense of urgency for the time being about COVID vaccines and boosters, but still bears watching in the quarters ahead if current conditions make you cautious about the company’s value proposition. If you prefer to focus on short-term trading strategies, you could use a push above $48.50 as a signal to consider buying the stock or working with call options, using a bullish near-term target price at around $51 to take profits. You could also use a drop to around $44 as an opportunity to think about shorting the stock or buying put options, using $40 as a useful bearish target.