Buy, Sell, Or Hold Pfizer At $37?

Pfizer (NYSE:PFE) stock declined 4% from $39 in the beginning of this year to $37 as of April 24, compared to over a 10% decline for the broader S&P 500. While Pfizer stock has outperformed the broader markets, we believe there is close to 20% upside potential from the current levels. Why is that? Pfizer is going through restructuring of its business segments, which will help the company focus on its fast growing Biopharma segment. Pfizer’s stock was up only 16% between 2017 and 2019, as compared to over 20% growth for the S&P 500. Our dashboard, ‘What Factors Drove 12% Change In Pfizer’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

While Pfizer’s stock price grew 16% between 2017-19, the growth is much lower than some of its peers, such as Merck, which saw a 55% jump over the same period. The reason for Pfizer’s stock’s low growth can be attributed to the company’s mediocre performance. Pfizer’s revenues were down -1.5% from 2017 to 2019, partly due to divestiture of the consumer healthcare business in 2019. Though adjusted net income margin grew 172 bps from 30.6% in 2017 to 32.3% in 2019. Pfizer also repurchased its shares over the last 2 years. Specifically, the company has invested about $20 billion in repurchases in the last two years, resulting in about 7% lower outstanding shares. Lower shares outstanding, clubbed with margin expansion, partly offset by a low single-digit decline in revenues, led to 11% adjusted EPS growth.

Finally, Pfizer’s P/E multiple saw slight growth from 12.6x in 2017 to 13.2x in 2019. While Pfizer’s P/E is down to about 12.7x now, given the volatility of the current situation, there is an additional possible upside for Pfizer’s multiple, when compared to levels seen in the past years – P/E of 13.2x at end of 2017, and 12.7x currently.

How Is Coronavirus Impacting Pfizer’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact Pfizer’s revenues, as it faces supply chain disruptions, and potential impact on direct sales, due to postponement of minor health related issues and surgeries. Between January 31st and April 24th, Pfizer’s stock has remained flat at $37 (net change), vs. over 10% decline in the S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.

Notably, Pfizer derives over 45% of its revenues from the U.S., which has become the new epicenter of the outbreak, with the country recording the largest number of COVID-19 cases across the globe. As such, revenues are likely to be impacted by the ongoing crisis in the near term. We believe Pfizer’s Q1 results this week will confirm the trend in revenues. Going by historical trends, and potential of the company’s oncology and biosimilars portfolio, we believe that the company’s stock could potentially offer upside returns. Also, after divesting its consumer healthcare business, the company is in the process of divesting its legacy pharma business to merge with Mylan. After the restructuring is completed, Pfizer will purely focus on its core Biopharma segment, which has been the strong growth driver over the recent years. In fact, Biopharma segment revenue grew 11% between 2017 and 2019, led by strong growth in its breast cancer drug, Ibrance, and rheumatoid arthritis drug, Xeljanz. Moreover, the company has received regulatory approvals for biosimilars to some of the massive blockbuster drugs, including Humira, Herceptin, and Rituxan, and these will likely provide a significant boost to the company’s growth over the coming years.

There may be an even bigger opportunity when you compare Merck to Pfizer.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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