Pfizer Manages 35% Stock Growth Despite Revenue Decline

You don’t expect the stock of a large diversified company like Pfizer (NYSE:PFE) to return  30% in 3 years when the revenue is going down. However, that’s exactly what happened here! Large stock movements without any topline evidence are common in the pharmaceutical industry when promising drugs pass critical clinical trials or get approved by the FDA. However, this is much more common among smaller firms compared to a well diversified and mature company such as Pfizer. So what happened in Pfizer’s case? Pfizer’s P/E ratio almost halved between 2016 and 2019, so that clearly didn’t help. However, here is the surprise. The company’s EPS (earnings per share) expanded a massive 150% primarily due to large net margin expansion (130%). This can be attributed to de-consolidation of lower margin consumer healthcare business which unlocked more value for its shareholders. Our dashboard Why Pfizer stock is up 34.7% between 2016 and 2019 even though revenue decreased -2% ? summarizes key factors that drove Pfizer’s stock over the past 3 years.  

How Is 130% Margin Increase Possible For A Company Like Pfizer? Is It Sustainable?

Pfizer’s net margins increased from 13.7% in 2016 to 31.4% in 2019, implying nearly 2.3x expansion. But how is this even possible? There are two parts to this equation. First, the sustainable margin expansion. Pfizer’s gross margin increased from 76.7% to 80.6% as lower margin consumer business was de-coupled from Pfizer’s product portfolio, and the company benefited from lower royalty expense for Lyrica due to patent expiration. This efficiency is going to persist. Second, one-time gain of nearly $8 billion from consumer healthcare JV (joint venture) transaction was recorded in 2019 that gave a massive boost to net margins. This is temporary and will disappear going forward.

If most of the margin boost was temporary, does it mean that the market miscalculated?

The answer is NO. P/E shrank 50% to accommodate just this. Just like it is highly unlikely for net margin to expand 2.3X in a sustainable manner for a large and mature company like Pfizer, it is also highly unlikely for the P/E to shrink 50% in a short span of time and persist. Going forward, as net margin falls back to normal, yet higher than previous levels, P/E will go up and will be more reflective of the new structure.

To summarize, 30% gain in the stock in the last 3 years essentially reflected investors rewarding Pfizer’s more profitable structure as well as the gain from the JV transaction. De-consolidation is the reason why Pfizer’s revenue shrank in the first place. While the full impact of the de-consolidation on financials will be visible in 2020, the market seems to have already priced in the new Pfizer that will emerge from this.

But Pfizer isn’t the only pharma company showing an unexpected trend in stock price. In fact, there is another pharma company that has returned 2.5X times what Pfizer did for its shareholders between 2016 and 2019, despite a very modest revenue increase. Curious to find out which company it is? Click here. 

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