Why Pfizer Looks Undervalued At $38

Pfizer’s stock (NYSE:PFE) has outperformed the broader markets as well as some of its peers over the last few weeks. While Pfizer stock grew 32.5% since the recent lows of March 23, the S&P 500 gained 28.0%. Looking at other pharmaceutical giants, Roche gained 29.3%, Novartis is up 18.8%, and Merck 20.2%. If we look at the returns since the end of January, after the WHO declared a global health emergency, Pfizer has significantly outperformed with a 1% gain vs. a decline of 12% for the S&P 500. Why is that? The healthcare sector, in general, has remained resilient throughout the crisis, thus far. For Pfizer, it is in the midst of restructuring with a spin-off of its consumer healthcare business already completed, while that of legacy drugs is in process. The restructuring will allow the company to focus on the high growth Biopharma segment, which includes oncology drugs, such as Ibrance, vaccines, such as Prevnar, and Pfizer’s newly approved biosimilars for some of the blockbuster drugs, including Humira and Avastin.

We don’t foresee any significant impact on Pfizer’s business from the current crisis, and despite its outperformance, we believe Pfizer’s valuation to be $46 per share – roughly 20% ahead of the current market price. Our price estimate takes into account the latest earnings as well as the company’s guidance. Our valuation is based on 4 factors: Pfizer’s Total Revenue, its Net Income Margin, No. of Shares, and P/E Multiple. We briefly discuss these factors below.

Pfizer’s Revenues And EPS Will Be Lower In 2020, Due To The Impact of Consumer Healthcare Spinoff

• Pfizer’s Revenues have seen a marginal decrease of -1.5% from around $52.5 billion in 2017 to $51.8 billion in 2019 and we expect it to fall to $49.8 billion in 2020, due to the spin-off of the consumer healthcare business.
• A separate interactive dashboard analysis on Pfizer’s Revenues details how the company makes money.
• Pfizer’s Non-GAAP Net Income has increased from around $16.1 billion in 2017 to $16.7 billion in 2019 and we expect it to fall to $16.1 billion in 2020. This change is likely to be led by lower revenues and improved margins. A separate interactive dashboard analysis on Pfizer’s Margins highlights the company’s various expenses components in detail.
• Pfizer’s Non-GAAP EPS has increased from $2.69 in 2017 to $3.00 in 2019 and we expect it to fall to $2.96 in 2020. The change in EPS can be attributed to a reduction in adjusted net income and a lower expected share count due to stock repurchases.
• Our Price Estimate of $46 For Pfizer’s Stock implies a 15.6x P/E Multiple on expected FY2020 Adjusted EPS of $2.96. Note that Pfizer’s P/E Multiple is lower than some of its peers.