Why Pfizer Is Seriously Mispriced

Pfizer trades with a valuation well off of its 10-year average

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Nathan Parsh
Sep 18, 2020
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Shares of Pfizer (

PFE, Financial) have declined almost 7% since I last looked at the company in depth. Despite this weakness, I believe that the company has strong prospects for growth. The stock continues to offer a dividend yield that is superior to its long-term average while trading with a very low price-earnings multiple.

This article will examine why I think Pfizer remains a strong buy for investors looking for exposure to the health care sector.

Quarterly highlights

Pfizer reported second quarter earnings results on July 28. The company's revenue fell 11% year-over-year to $11.8 billion, but managed to top Wall Street analysts' estimates by almost $250 million. Adjusted earnings per share decreased by 2 cents, or 2.5%, to 78 cents. Analysts had expected lower numbers, as EPS was 12 cents higher than estimated. Currency was a 2% headwind to revenue and lowered adjusted EPS by 3%.

Let's start with the bad. The company's Upjohn segment was down 31%. Upjohn houses Pfizer's off-patent branded and generic medicines and is expected to complete its merger with Mylan (MYL) in the fourth quarter of this year. Much of this decline was due to the loss of exclusivity for Lyrica in 2019. Removing this, Upjohn revenue were down 6%. Offsetting this decline was 17% growth in China, which saw strength in Lipitor and Norvasc.

Covid-19 is believed to have reduced revenue by approximately $500 million, or 4%, due to fewer wellness visits for pediatric and adult patients in the U.S. and lower demand for products in China. Partially offsetting this was higher demand in the U.S. for sterile injectable products and higher volumes of Prevnar 13 in international markets.

Pfizer has several vaccines that are being tested to protect against Covid-19. The company, in combination with BioNTech, started a Phase 2/3 safety and efficacy clinical study to evaluate a possible candidate. Dosing in the U.S. began at the end of July. Pfizer has agreements to deliver 30 million doses to the UK and up to 600 million doses to the U.S. if successful.

Now for the good news. Biopharma sales grew 4% and 6% excluding the impact of currenecy.

Source: Pfizer's Second Quarter Earnings Presentation, slide 5.

Pfizer did see Covid-related challenges in its hospital related businesses, which was down 2% to $1.8 billion, and vaccines, which was down 9% to $1.25 billion. However, oncology had sales growth of 18% to $2.65 billion while rare diseases was higher by 31% to $681 million.

Pfizer's top selling products continue to see solid to strong growth rates.

Ibrance, which treats breast cancer, saw sales improved 7% to $1.35 billion. U.S. sales were up 11%. International markets had 18% growth in volumes, but revenues were higher by just 3% due to price reductions. Analysts see peak sales of almost $8 billion.

Sales for Eliquis, used to prevent blood clots, could achieve peak sales of $12 billion. It grew 17% year-over-year to $1.27 billion as it continues to take market share.

Pfizer's flu vaccine Prevnar 13/Prevenar 13 declined 5% to $1.12 billion, but revenues outside of the U.S. were up 12% due to heightened vaccine awareness due to the pandemic. U.S. results were weaker by 22% due to fewer doctor visits.

Xeljanz, which is used to treat rheumatoid arthritis, had sales growth of 5% to $635 million. Regions outside the U.S. were particularly strong as sales improved 14%.

Xtandi, which treats prostate cancer, saw revenues that were higher by 32% to $266 million. Royalties from outside the U.S. were $108 million. Xtandi has a leading position in new patient starts in approved indications. Pfizer is waiting on approval from the FDA, but the company saw a significant decrease in death in men with non-metastatic castration-resistant prostate cancer in a recent trial. This would be an additional indication for the drug. Xtandi peak sales could reach $5 billion.

Inlyta increased 87% to $195 million. Sales for Inlyta, which treats kidney cancer, doubled from the prior year due to approvals for additional indications.

Vyndaqel/Vyndamax added $277 million to revenue totals. This product helps prevent heart failure. Following its May launch, Vyndaqel/Vyndamax now has been prescribed more than 10,000 times. New patients did slow down due to fewer doctor visits during the quarter, but the company did see an increase in diagnosis rates as health systems began to operate on a more normalized basis during the quarter.

Biosimilars added $289 million to results, which was a 33% gain year-over-year. Demand was especially high in the U.S., where these products were led by gains in oncology.

Pfizer managed expenses well during the quarter, down 14% to $3 billion. The company closed the quarter with $46.4 billion of current assets, including $11.4 billion of cash, cash equivalents and short-term investments. This compares to $32.7 billion of current liabilities, which includes $13.1 billion of short-term debt. Total debt stands at $63.6 billion.

While debt due within a year and total debt is a large amount, Pfizer generates a lot of free cash flow. Free cash flow was nearly $10 billion last year and around $14 billion each of the three prior years. Free cash flow for the first half of 2020 was $5.7 billion. This should provide ample coverage for debt repayments and dividend distributions.

Following second quarter results, Pfizer now expects adjusted EPS of $2.85 to $2.95 for the full year, up from $2.82 to $2.92 previously, on revenue of $48.6 billion to $50.6 billion, up from $48.5 to $50.5 billion previously. This would be a 1% increase in EPS from 2019, which is a solid result..

Pfizer also revised guidance for the New Pfizer business following the exit of Upjohn. The company moved both revenues and adjusted EPS up slightly for 2020, showing that the remaining business is expected to remain in growth mode.

Valuation remains extremely low

Pfizer closed Thursday's trading session at $36.82. Based on the midpoint of expected EPS for the year, the stock has a forward price-earnings ratio of 12.7. This is a lower valuation than when I looked at the company back in January.

This compares very well to the price-earnings ratios of Pfizer's peers:

Only AbbVie and Bristol-Myers, two other drug companies that I like a lot, have a lower price-earnings ratio than Pfizer at this point in time.

The average price-earnings ratio over the last 10 years for Pfizer was 20. I continue to have a price-earnings target of 14 to 16 for the stock. Applying expected EPS to this valuation range gives us a price target range of $40.60 to $46.40. This would be a 10.3% to 26% increase in value from the most recent closing price.

Also added to this return would be the dividend yield. With an annualized yield of $1.52, shares of Pfizer yield 4.1% at the moment. This compares very favorably to the stock's five and 10-year average yields of 3.4% and 3.6%, respectively.

The stock would yield 3.7% at the low end of my price target range and 3.3% at the high end. Using the possible increase in share price along with the corresponding yield, shareholders could see total returns of 14% to 29.3%.

Final thoughts

Pfizer performed well even as adverse circumstances. The company's Upjohn segment was weaker due mostly to one product, but this business is in the process of being merged with Mylan. Nearly all of Pfizer's most important products had at least solid growth in the quarter. The company boasts a nice pipeline of medicines as well, with nearly 100 products in various testing phases and almost 30 in phase 3 trials. This is the result of spending more than $60 billion on research and development since 2013.

Investors looking for income should find the 4%+ yield appealing. This is more than twice the average yield of the S&P 500 and above the stock's average yield since 2010. The company has raised its dividend in 51 out of the last 53 years.

Using a price-earnings ratio that is more in-line with peers, Pfizer appears to be at least 10% undervalued. Factoring in the dividend yield, total returns could be just under 30% from the current share price.

I continue to believe that Pfizer offers one of the best values in both the health care sector and the market as a whole. Thus, I continue to rate shares as a strong buy.

Author disclosure: the author has a long position in Pfizer and AbbVie.

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I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.