Shares of pharma giant Pfizer (NYSE: PFE) have held up relatively well over the past year, with the company’s essential pharmaceuticals and vaccines capable of producing resilient sales during the current highly-volatile environment. Pfizer is set to generate record earnings in Fiscal 2022, and while investors are bracing for declining vaccine sales in the coming years, the stock appears quite cheap both based on its current and future profit estimates.
Accordingly, I am bullish on the stock.
Pfizer is Set to Generate Record Profits This Year
Pfizer generated record earnings last year, as, besides robust sales from its flagship pharmaceuticals, the company also benefited significantly from extraordinary sales generated by its COVID-19 vaccine.
Despite Pfizer’s revenues and net income growing by 95.2% and 140% in Fiscal 2021 to $81.3 billion and $21.9 billion, respectively, the company is set to exceed these numbers in its Fiscal 2022.
So far, the company’s pharma portfolio has continued to perform resiliently, while COVID-19-related revenues continue to contribute substantially despite the pandemic fading out over the past several months.
In fact, COVID-19-related revenues continue to grow. In its Q2 results, the company reported revenue growth of 49% to $27.7 billion, with vaccine revenues growing 13% to $10.5 billion. Sure, vaccine revenues should ease in the coming years based on the current trajectory of COVID-19, but they should still contribute significantly to Pfizer’s financials for a couple more quarters at least – including in the company’s upcoming Q3 results.
Specifically, according to consensus estimates, Pfizer should report earnings per share of $1.40 in Q3, a year-over-year increase of almost 5%. For the full year, Pfizer is expected to generate all-time-high revenues of $99.7 billion, up 22.6% year-over-year, and all-time-high earnings per share of $6.40, up 45% year-over-year. The company is printing cash these days.
How Much Should You Pay for PFE Stock?
When it comes to valuing Pfizer, one has to remember that the company’s results are currently inflated. Based on earnings per share estimates, the stock’s forward P/E for 2022 stands close to 7x – obviously a dirt-cheap valuation for such a quality pharma giant. However, some perspective is needed here. In my view, as long as you pay anything below 12x forward earnings, you are getting a quality company at a discount, especially considering the company’s rich development pipeline. Here’s why.
The COVID-19 vaccine-related sales will eventually unwind, assuming the pandemic won’t show any new aggressive waves. Thus, to value Pfizer based on this year’s profitability can be quite misleading.
Indeed, analysts are already aware of this, and thus they project earnings per share to fall from around $6.40 this year to $5.10 and $4.26 in Fiscal 2023 and Fiscal 2024, respectively, before potentially growing from there. However, even then, paying 10.6x the company’s Fiscal 2024 normalized earnings is still a great deal.
Over the previous decade, Pfizer’s forward P/E hovered between 12x and 16.5x. So, even by valuing the company through its normalized future earnings, Pfizer is still trading at a discount.
Are Pfizer’s Capital Returns Noteworthy?
The great thing about Pfizer’s discount at the moment is that investors can take greater advantage of the company’s capital returns. Let’s break them down.
Pfizer’s Dividends
Pfizer has increased its dividend for 13 consecutive years, with its 10 and five-year dividend CAGRs standing at 6.9% and 5.4%. Not a tremendous pace, but an acceptable one from a pharma giant the size of Pfizer. Further, the yield now stands at a noteworthy 3.6%, which should nicely contribute to total returns, while the dividend itself is very well-covered.
The payout ratio stands at 24.9% based on this year’s earnings, or again, if we use the projected Fiscal 2024 “normalized” earnings, it stands at around 37.5% – still maintaining robust coverage.
Pfizer’s Stock Repurchases
Pfizer has an extended track record of heavy buybacks. Between 2010 and 2020, the company repurchased and retired around 31% of its outstanding shares. Since 2020, no repurchases have occurred, as management has instead focused on deleveraging.
Specifically, since 2020, the company’s net debt has declined from an outrageous $52.6 billion to $7.2 billion, as per its latest quarterly data. With the balance sheet becoming healthy again and the stock trading on the cheap, as we mentioned earlier, I believe share repurchases will restart any moment now. Repurchases should be very accretive to shareholder value creation at the stock’s current levels.
What is the Target Price for PFE Stock?
Turning to Wall Street, Pfizer has a Moderate Buy consensus rating based on five Buys and seven Holds assigned in the past three months. At $54.67, the average Pfizer price target implies 20.05% upside potential.
Conclusion: A Quality Company Trading on the Cheap
Pfizer is one of the highest-quality big pharma companies, with its core portfolio and pipeline remaining robust. With the help of its COVID-19 vaccine sales, revenues and profits should reach new all-time highs this year. Also, while vaccine sales are most likely going to start gradually evaporating from the current levels from next year, the company should still remain very profitable. Based on the stock’s current and future-based valuation and the company’s strong capital-return prospects following the recent deleveraging, I believe that Pfizer is undervalued.
