Shares of Pfizer inc. (PFE, Financial) have gained more than 16% since reporting earnings results late last month. This compares to just a 1.5% gain in the S&P 500 index. Much of the gain in the stock in this short amount of time was due to a significant contribution from Covid-19 related sales, but Pfizer is also seeing high growth rates among its most important products.
At that time of my last in-depth look at Pfizer, the stock was trading near $37 per share. The stock has increased 32% since then, a higher return than even my most bullish estimate. That said, there remains a lot to like about the company, and the stock continues to trade with a price-earnings ratio below that of its own historical average and its peers. Let’s look closer at why I feel that Pfizer is not done going higher.
A rundown of earnings highlights
Pfizer reported second-quarter earnings results on July 28. Revenue surged 61% to just under $19 billion and was $250 million above what Wall Street analysts had expected. Adjusted net income of $6.1 billion, or $1.07 per share, compared favorably to adjusted net income of $3.5 billion, or 62 cents per share, from the prior year.
The company's Covid-19 vaccine, developed with BioNTech SE (BNTX), was a major tailwind for the company, as related revenues were $7.8 billion for the quarter. Excluding this benefit, however, revenues still grew 10% year-over-year to $11.1 billion.
Pfizer produced growth in most of its main products:
- Eliquis, which helps reduce blood clots and the risk of stroke, grew 13% to $1.5 billion. Higher adoption rates in the U.S. and emerging markets helped drive growth.
- Ibrance, used to treat certain types of breast cancer, was up 2% year-over-year to $1.4 billion. This product benefited from a recovery from Covid-19 as diagnosis and treatment starts showed signs of stabilizing. International revenues were higher by 21%, but were nearly offset by weakness in the U.S.
- Prevnar 13, which is a vaccine used to prevent 13 types of pneumococcal bacteria, was higher by 9% to $1.24 billion. An increase in patient visits among adult and pediatric patients as well as the timing of government purchases resulted in a 34% improvement in the U.S. It should be noted that this product faced challenges in 2020 due to less healthcare activity related to the pandemic.
- Vyndamax, which is used to prevent a certain type of heart failure from worsening, was up 77% to $501 million. This product saw an increase in uptake in the U.S. and international marekts. Higher demand in Europe and Japan led to a doubling of international revenues.
- Xtandi, which treats prostate cancer, improved 14% to $303 million due to an increase in demand in several types of prostate cancers.
- Inlyta, which treats kidney cancer, was up 20% to $257 million due to higher uptake rates in the U.S. Europe. The product has benefitted from its fire-line treatment of patients with advanced renal cell carcinoma.
- Biosimilars grew nearly 90% to $559 million due largely to several oncology launches that have performed very well.
Following second-quarter results, leadership has raised its guidance for the remainder of the year. Revenues are now projected in a range of $78 billion to $80 billion, up from $70.2 billion to $72.5 billion, while adjusted earnings per share is expected in a range of $3.95 to $4.05, up from $3.55 to $3.65 previously.
Takeaways
Pfizer has guided towards the delivery of more than 2 billion Covid-19 vaccine doses this year, with the company expected to ramp up production to 3 billion doses by the end of 2021. As a result, the company believes that the vaccine will generate $33.5 billion in revenue for the year, up from prior estimates of $26 billion.
Just 59.7% of the U.S. population has received at least one dose of the vaccine, with 50.7% of the population having become fully vaccinated against the virus. There are still many people who have yet to receive even one dose of the vaccine.
Some of this will change as it becomes approved for use in those under the age of 18. Already, Pfizer’s vaccine is approved for use in those age 12 to 17. Leadership stated in its earnings release that it initiated a Phase 2 study to determine the safety and effectiveness of its Covid-19 vaccine in those aged six months to 11 years old.
Of course, there are those who will not choose to get the vaccine at all. This will put some ceiling on revenues, but there still remain many people who would get the vaccine if it were available to them or approved for their age group. This also doesn’t take into account potential booster shots for the Delta variant or future variants. The fact that Pfizer is going to ramp up its production by nearly 50% from an already high base shows that the company expects the demand for its Covid-19 vaccine is unlikely to subside in the near future.
Moving beyond the vaccine, Pfizer saw high growth rates in its most important products. For example, as elective procedures return to more normalized levels the demand for Eliquis should continue to see improved demand. Ibrance was weaker in the U.S., but rebounded in regions that had higher patient activity. This could be a sign of things to come in the domestic market. Prevnar 13 is also acting much better and should continue to do so as the school year opens and children receive their immunizations.
There were some weak areas, especially in inflammation and immunology, due to biosimilar competition, but the vast majority of Pfizer’s key products demonstrated solid results.
Pfizer’s pipeline also holds promise for the future as well as the company could bring as many as 10 products to market in the next year and there are another 22 products currently in Phase 3 trials. In all likelihood, not all of these trials will reach all of their end goals and not every product will be a blockbuster, but Pfizer’s pipeline is extensive and covers many different areas, including oncology, inflammation and immunology, rare diseases and vaccines.
Valuation analysis
Shares of Pfizer now trade nearly in-line with the stock’s intrinsic value according to GuruFocus, and this is after spending much of 2021 in undervalued territory.
Pfizer has a GF Value of $49.29. Using Monday’s closing price of $48.91, the stock has a price-to-GF-Value ratio of 0.99. Achieving this level would mean a small gain from recent levels.
However, I am more bullish on Pfizer because the stock trades with a steep discount to its own historical average. It is also undervalued against many names in its peer group, few of which I feel have as much going for it as Pfizer does.
Using the midpoint of revised guidance for the year, shares trade with a forward price-earnings ratio of 12.2 even after the sizeable gains that the stock has experienced in the short-term.
Compared to its peer group, Pfizer continues to look inexpensive. Below are some of the forward price-earnings ratios for peers:
- AbbVie Inc (ABBV, Financial): 9.3
- AstraZeneca (AZN, Financial): 21.7
- Bristol-Myers Squibb (BMY, Financial): 9.0
- Eli Lilly & Co. (LLY, Financial): 33.4
- Merck & Co. (MRK, Financial): 13.9
- Novartis AG (NVS, Financial): 15.2
- Sanofi (SNY, Financial): 13.7
Just AbbVie and Bristol-Myers have a lower forward price-earnings multiple.
Shares of the company have traded with an average earnings multiple of 20 since 2011. My target valuation range is a more conservative 14 to 16 times earnings per share, which I feel is an appropriate figure given the positives that the company has working in its favor.
Applying expected earnings per share for 2021 to this target range results in price target range of $56 to $64. Shareholders could be looking at an additional 14.5% to 31% in returns. Factor in the dividend, which is 3.2% currently, and total returns could be at least in the high teens.
Due to the company’s revenue and earnings beat and raise, valuation, solid yield and double-digit potential returns, I purchased additional shares of Pfizer at $45.86 on Aug. 9.
