Pfizer Is A Buy Now – Pfizer Inc. (NYSE:PFE)

Pfizer (PFE) has seen its share price fall from the low-$40s to around $30 per share, largely because of the coronavirus outbreak which has impacted global markets. The outbreak, however, should concentrate people’s minds on the reality that people cannot do without medication, and that this accounts for the profitability of the pharmaceutical sector. Specifically, prospective investors should realize that they have an excellent opportunity to start a position with this pharmaceutical firm at a bargain price.

The coronavirus outbreak has spared few stocks from experiencing a price drop, as businesses in every sector – from tourism to technology – have been affected. Healthcare stocks like Pfizer have not been spared the general bearishness that has been caused by the hindrance to the global economy that the coronavirus has caused.

However, healthcare companies such as Pfizer may provide the key to overcoming the epidemic. On 03/17/2020, the New York-based drugmaker announced that it has partnered with German biotechnology firm BioNTech SE (BNTX) to co-develop an mRNA-based vaccine for coronavirus, which should be ready for clinical testing by late April. Pfizer’s chief scientific officer, Mikael Dolsten, summed up the purpose of the partnership:

We believe that by pairing Pfizer’s development, regulatory and commercial capabilities with BioNTech’s mRNA vaccine technology and expertise as one of the industry leaders, we are reinforcing our commitment to do everything we can to combat this escalating pandemic, as quickly as possible.

In addition to developing the coronavirus vaccine – clearly the key priority, as it should be – Pfizer reported the following day that its experimental vaccine abrocitinib, used for atopic dermatitis, proved effective in a Phase III study. The firm stated that:

These data, along with other results from other pivotal trials, MONO-1 and MONO-2, will support filings with regulatory bodies, starting with the US Food and Drug Administration (FDA) planned for later this year.

Pfizer also reported a successful outcome for its 20vPnC candidate, which was tested in a Phase III study on patients without immunity to pneumococcal disease, a form of bacterial infection. Pfizer hopes to file an application for this vaccine before the end of the year. These are but a sample of what Pfizer has in the pipeline for 2020, as candidates for treating early breast cancer, hemophilia, and 1L colorectal cancer are also to be submitted for studies. The new drugs should enable Pfizer to continue being profitable in the years ahead, and the company’s profitability is clear from its 26.90% operating margin and the healthy revenue and net income figures that it has reported over the past five years.

Year Revenue ($) Net Income ($)
2015 48.85 billion 6.95 billion
2016 52.82 billion 7.2 billion
2017 52.55 billion 21.31 billion
2018 53.65 billion 11.14 billion
2019 51.75 billion 16.27 billion

Figures collated from annual reports available on Pfizer’s investor relations page.

The slight drop in revenue from 2018 to 2019 can be accounted for on the basis that the consumer healthcare segment is now incorporated as part of a joint venture with British pharmaceutical firm GlaxoSmithKline (GSK), not due to a weakness in business performance. Indeed, the superlative nature of Pfizer’s business performance is no secret to its shareholders, as it has benefited from the 25.72% return on equity (trailing twelve months) and 10 years of consecutively rising dividends. That dividend streak is likely to continue, as Pfizer has a 56.55% payout ratio and reported free cash flow of $10.41 billion in its Q4 2019 results.

Pfizer’s profitability has rewarded investors with 10 years of consecutively rising dividends. Image provided by Common Dreams.

Pfizer’s ability to maintain its dividend streak, its investment in its pipeline, and its financial health in the current economic environment are borne out by its strong balance sheet. Long-term debt of $37 billion is offset by the firm’s net worth of $63.45 billion, and total current liabilities of $37.3 billion are offset by total current assets of $32.8 billion, cash on hand worth $1.31 billion, short-term investments worth $8.53 billion, and total accounts receivable of $8.72 billion. All told, current investors should have few qualms about continuing to hold Pfizer in their portfolios.

However, despite the strong pipeline, prospective investors may be put off by the projected earnings-per-share growth of 0.60% over the next five years. Consequently, they are likely to require a discount to fair value before investing in this stock – and at this time that is on offer.

Pfizer stock traded at $30.42 per share at close of market on 03/19/2020. Chart generated by FinViz.

At close of market on 03/19/2020, Pfizer was trading at a share price of $30.42 with a price-to-earnings ratio of 11.53 based on earnings per share of $2.81. The current P/E is lower than the five-year average P/E of 21.34, and the current dividend yield of 4.70% is higher than the five-year average dividend yield of 3.50%. Furthermore, the current P/E is lower than the chemical manufacturing sub-sector average of 28.89 and the S&P 500 (SPY) average of 20.40. Indeed, by most metrics, Pfizer appears undervalued relative to both its sub-sector and to the index – only its price-to-sales ratio is higher than the index average.

Metric Pfizer Sub-Sector Index
P/E 11.53 28.89 20.40
P/CF 13.27 15.32 14.23
P/B 2.65 8.11 3.27
P/S 3.23 5.55 2.30

Figures collated from FinViz, Morningstar, and TheStreet

On balance, then, Pfizer appears to be trading at a discount to fair value – but what is fair value for Pfizer? To determine fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 0.77 (11.53 / 15 = 0.77) and divide the current share price by this valuation ratio to get a first estimate for fair value of $39.51 (30.42 / 0.77 = 39.51). Then I will divide the current P/E by the five-year average P/E to get a valuation ratio of 0.54 (11.53 / 21.34 = 0.54) and divide the current share price by this valuation ratio to get a second estimate for fair value of $56.33 (30.42 / 0.54 = 56.33).

Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 0.75 (3.50 / 4.70 = 0.75) and divide the current share price by this valuation ratio to get a third estimate for fair value of $40.56 (30.42 / 0.75 = 40.56). Finally, I will average out these three estimates to get a final estimate for fair value of $45.47 (39.51 + 56.33 + 40.56 / 3 = 45.47). On the basis of this estimate, the stock is undervalued by 33%.

In summary, Pfizer is an excellent pharmaceutical pick with a strong pipeline, a decent dividend record, an excellent balance sheet, and a profitable business model that will enable it to withstand the present economic turmoil. For long-term value investors and income investors, the stock is a buy at a 33% discount to fair value.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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