Pfizer: Discounted For A Reason – But Dividend Story Remains Rich

Summary:

• PFE’s core portfolio and strategic acquisitions continue to deliver decent results, no matter the lumpy sales contribution from Comirnaty and Paxlovid.
• The company raised their FY2024 core portfolio sales guidance, with the richer adj EPS numbers signaling the management’s promising progress in cost and operational optimization.
• Even so, PFE continues to face massive patent cliff headwinds through 2030, with $31.58B of its annualized FQ3’24 revenues at stake.
• Combined with the elevated debt levels, it is unsurprising the stock has been discounted as it has, with the management likely to embark on intensified M&A and R&D efforts ahead.
• These developments also imply that PFE is only suitable for investors with a long-term investing trajectory, no matter the rich dividend yields.

PFE Is Inherently Undervalued – Offering Opportunistic Investors With The Dual Pronged Returns

We previously covered Pfizer (NYSE:PFE) (NEOE:PFE:CA) in August 2024, discussing the stock’s bullish support at $25s, with it signaling that the worst might already be well behind us, thanks to the core portfolio’s and plug in acquisition’s robust performance metrics.

While we had maintained our Buy rating then, we had also warned investors to temper their near-term expectations, since H2’24 might bring forth further deterioration in the balance sheet, as the management seemingly leaned into debt to finance its hefty annualized dividend obligations.

PFE YTD Stock Price

Since then, PFE has underperformed at -3.5% compared to the wider market at +2.3%, with the same sideways trading also observed in many of its pharmaceutical peers in varying degrees.

This is despite the pharmaceutical company’s double beat FQ3’24 performance, with core portfolio revenues of $13.58B (+5.7% QoQ/ +13.2% YoY) and adj EPS of $1.06 (+76.6% QoQ/ +723.5% YoY).

These numbers imply PFE’s robust monetization across the existing pipelines and new acquisitions, attributed to the two top-line drivers, Eliquis at $1.61B (-13.9% QoQ/ +8% YoY) and Vyndaqel family at $1.44B (+9% QoQ/ +61.7% YoY), along with the Seagen portfolio at $854M (+1% QoQ).

This is significantly aided from Comirnaty’s lumpy sales at $1.42B (+629.2% QoQ/ +9.2% YoY) and Paxlovid at $2.7B (+976.8% QoQ/ +1238.1% YoY).

While we have previously been concerned about the Seagen related debt, PFE has reported a sequentially moderating net debts $57.74B (-7.3% QoQ/ +192% YoY), as the management continues to “de-lever our balance sheet.”

We have also observed a robust increase in its YTD net cash provided by operating activities of $6.02B (+73.9% YoY), aided by the YTD monetization of its Helion shares at $6.9B, allowing the pharmaceutical company to continue paying out its YTD dividend obligations of $7.13B (+2.8% YoY) as well.

These efforts continue to demonstrate PFE’s competence in delivering “on our financial commitments and create long-term value for shareholders,” no matter the near halving observed in its stock prices after the hyper-pandemic heights.

The Consensus Forward Estimates

PFE has raised their FY2024 revenue guidance growth to +10% YoY at the midpoint (ex-Comirnaty and Paxlovid), compared to the original guidance of +9% YoY offered in the FQ4’23 earnings call.

Combined with the raised Comirnaty and Paxlovid sales guidance at $10.5B in FY2024, compared to the original guidance of $8B offered in the FQ4’23 earnings call, it is unsurprising that the management has raised their overall FY2024 revenue guidance to $62.5B (+6.8% YoY) and adj EPS guidance to $2.85 (+54.8% YoY).

This is compared to the original guidance of $60B (+2.5% YoY) and $2.15 (+16.8% YoY), respectively, with the accelerating bottom-line expansion also implying the management’s promising progress in cost and operational optimization.

It is unsurprising then, that the consensus have maintained their promising forward estimates, with PFE expected to report stable top/ bottom-line performance through FY2026, after the trough FY2023 year.

PFE’s Upcoming Patent Expiries

On the other hand, readers may want to brace for PFE’s minimal growth as well, attributed to the upcoming “patent expiries in 2026 through 2030 as several of our in-line products experience patent-based expirations.”

With $31.58B of its annualized FQ3’24 revenues at stake, particularly the Prevnar family at $7.21B and Eliquis at $6.46B, it is unsurprising that the pharmaceutical company has underperformed thus far, with market sentiments pessimistic.

PFE Valuations

This is also why the PFE stock has been discounted to FWD P/E non-GAAP valuations of 9.50x, compared to its 5Y mean of 11.43x, 10Y mean of 12.79x, and the sector median of 20.88x.

Even when we compare its FWD PEG non-GAAP ratio of 1.25x, compared to the sector median of 1.99x and its peers, including Bristol-Myers Squibb Co. (BMY) at 4.14x, Merck (MRK) at 0.31x, AbbVie (ABBV) at 2.20x, and Amgen (AMGN) at 3.39x, it is undeniable that PFE appears to be reasonably valued here, offering interested investors with a decent margin of safety.

So, Is PFE Stock A Buy, Sell, or Hold?

PFE 1Y Stock Price

For now, PFE has already lost much of its Q2’24 and Q3’24 gains, with the stock breaching the support levels of the $28s albeit it was successfully defended at the $27.70s.

As a dividend stock, it continues to offer a relatively rich forward yield of 6%, compared to the 5Y mean of 3.11% and the sector median of 1.48%, thanks to the ongoing correction.

We also stand by our previous base-case long-term price target of $36.50, based on the consensus FY2026 adj EPS estimates of $3.04 and the 1Y P/E mean of ~12x, and the bull-case price target of $45.60, in the event of a future upward re-rating closer to its peers’ P/E of 15x.

With PFE still offering a relatively compelling dual pronged prospective return through dividend incomes and capital appreciation, we are maintaining our Buy rating here.

Risk Warning

It goes without PFE is only suitable for dividend oriented investors, attributed to its uncertain prospects as a large portion of its existing portfolio face consecutive patent cliffs through 2030.

While the consensus estimates over $16B in annual Free Cash Flow generation from FY2025 onwards, we are likely to see its deleveraging process to be rather slow attributed to its hefty annualized dividend obligations of $9.5B.

At the same time, the upcoming patent cliff also implies further M&A activities, as the management also stated it will “prioritize our R&D pipeline and future business development,” further underscoring why its future dividend growth may be lower than its historical 10Y mean of +5.62%.

As a result, while we continue to reiterate PFE as a Buy, the stock is likely to remain discounted for a little longer until more of its pipeline drives new growth opportunities.

This is especially since its obesity offerings are only in the Phase 1/ 2 clinical trials – with any FDA approval and successful monetization likely to occur only in the late half of the decade.

This also means that PFE is only suitable for patient investors with a long-term investing trajectory, since its reversal is likely to be rather prolonged.

---

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

---