Investors have been puzzled when valuing companies that benefited from the Covid-19 pandemic.
Pfizer (PFE)’s collaboration with BioNTech (BNTX) in making a vaccine, plus the antiviral drug Paxlovid, has substantially increased revenues and balance over the past two years. The market has already correctly discounted declining covid-related sales, which are embedded in PFE’s 7x price-to-earnings ratio.
But with Pfizer shares already down about 15% in 2023, has the market over-discounted PFE and underestimated the pipeline and residual benefit from Covid?
A thorough look at Pfizer’s finances can provide clarity. By 2022, as much as 40% of Pfizer’s sales were Covid-related – $40 billion of its $100 billion in total revenue.
Remarkably, Pfizer had net debt of $44 billion at the end of 2019. In the past two years of stunning profitability, Pfizer’s balance sheet is now cash neutral.
Two years of Covid-related cash flow have wiped out all of its net debt — the equivalent of $8/share — leaving its current enterprise value (EV) of $245 billion, slightly below its $260 billion EV at the end of 2019. can spend on biotech acquisitions, the balance sheet improvement and flexibility appear to be undervalued by investors.
No doubt Pfizer will see a rapid decline in its Covid business. However, the trick will be understanding when the decline is fully discounted in the stock.
UBS downgraded PFE’s rating last week, not because they expect the stock to trade much lower, but because of the lack of a catalyst for an upside. Wall Street doesn’t like it when the numbers have to go down, which is the case with Pfizer’s Covid vaccine and antiviral sales.
UBS’s view: “Despite the arguably more positive growth outlook compared to our previous model, we now see PFE in a period of some revenue/EPS decline, with risks to estimates that are on the downside from when we upgraded PFE in 2021 when PFE was heading into a period of assured high growth, with positive expectations.”
Pfizer hosted an analyst day in December to highlight its robust drug pipeline, primarily in five categories: vaccines, migraines, inflammation and immunology, oncology and obesity. This year, Pfizer expects 7-9% sales growth without Covid.
Bank of America believes “the launch momentum over the next 18 months has the potential to re-engage investors as Pfizer stock has underperformed peers to date.” The company is positive about the advancement of the RSV vaccine and the potential of its oral GLP-1 obesity drug in early development to compete with Eli Lilly (LLY) and Novo Nordisk (NVO).
When Pfizer reports fourth-quarter results this week, they will likely have earned $6.50 per share for 2022. Analyst consensus estimates expect a significant decline to about $4.30 in 2023 and $4.10 in 2024. Wall Street probably won’t be pricing PFE much higher than 10-11x earnings per share until there is a clearer growth path.
PFE is firmly in value territory and back to pre-pandemic valuation by some measures. Investors can comfortably buy the stock in the high $30 to low $40 and receive a healthy dividend of $1.64, currently yielding 3.75%, with the stock currently trading around $43.80.
Since the stock may be range-bound through 2023, writing covered calls will add to returns. The strong balance sheet and abundant cash flow could result in a shareholder-friendly share buyback of 10% of outstanding shares.
When Pfizer reports earnings on Tuesday, any additional weakness will likely turn out to be an opportunity to initiate or add to a position.
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