I am neutral on Pfizer (PFE) as it has a competitive position within the pharmaceutical and biotechnology industry, strong growth momentum, and discounted valuation multiples relative to the company’s trading history. On the other hand, the average price target implies weak upside potential over the next year.
Pfizer is a New York-based global Fortune 500 company that produces vaccines and medicines for cardiology, endocrinology, immunology, oncology, and neurology.
In this article, I will explain why I am neutral on the stock.
Large IP Library
Pfizer’s competitive advantage stems from its economies of scale and massive intellectual property library. It is able to sustain this technological advantage by leveraging its scale as it can invest a very large amount of money into its research and development efforts without eating too much into profitability. In fact, in 2021 it was the second-largest pharmaceutical company in the world in terms of revenue.
It is also able to generate stable revenues as its patents protect its products from meaningful competition, and its revenues are sourced from a diverse array of sources. For example, its largest product (Prevnar) represents just over 10% of its total revenues.
The company also has a highly respected and trusted brand name in the industry, as it served ~1.4 billion patients worldwide in 2021, was rated No. 2 among large biopharma companies in terms of consumer satisfaction/trust ratings, 61% of Americans have a favorable view of the company, and it was rated No. 4 on Fortune’s most recent World’s Most Admired Companies list.
Strong Performance Momentum
PFE has seen strong performance momentum lately. In Fiscal Year 2021, the company saw operational growth revenue soar by 92% and operational adjusted diluted earnings per share also grew by 92%.
This has prompted management to provide a record high forecast midpoint for 2022 of $6.45 and guide for continued growth (when not including short-term COVID-19 revenues) all the way through 2030 at a minimum thanks to its internal pipeline, continued business development, and “durable COVID-19 revenues” from booster shots.
Attractive Valuation Metrics
PFE stock looks very attractively priced at the moment based on its historical valuation multiples. Its EV/EBITDA ratio is cheap relative to its history at 6.4 compared to its historical average of 10.8 times.
Furthermore, its P/E ratio is 7.41 compared to its historic average of 12.7 times.
That said, analysts expect the company to see revenue, EBITDA, and normalized earnings-per-share decline meaningfully in the years to come as COVID-19 revenues decline. This means that the stock is likely not nearly as cheap as its current multiples imply.
According to Wall Street analysts, PFE earns a Moderate Buy analyst consensus based on six Buy ratings, eight Hold Ratings and zero Sell ratings in the past three months. Additionally, the average Pfizer price target of $61.21 puts the upside potential at 15.2%.
Summary and Conclusions
Pfizer is a leading global biotech and pharmaceutical company that has a long and illustrious history of generating strong shareholder returns and growing dividends per share.
It also benefits from a massive intellectual property library and a strong brand image. Furthermore, Wall Street analysts are generally bullish on it here, and the stock price looks cheap based on valuation multiples.
However, I am neutral as COVID-19 revenues are expected to decline sharply in the coming years, which should take some momentum out of its fundamentals, and also means that its valuation multiples are not as cheap as they appear.
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