Investors have faced a conundrum to assess which companies have benefited from the Covid-19 pandemic.
Pfizer’s (PFE) partnership with BioNTech (BNTX) to create a vaccine, as well as its antiviral, Paxlovid, has significantly increased its earnings and track record over the past two years. The market has already rightfully discounted the Covid-related waning selloffs, which are priced into PFE’s 7x price-earnings ratio.
But with Pfizer stock already down around 15% in 2023, has the market over-discounted the PFE and underestimated its pipeline and residual Covid benefits?
A close look at Pfizer’s finances can provide clarity. In 2022, 40% of Pfizer’s revenue was Covid-related — $40 billion of its $100 billion in total revenue.
Remarkably, at the end of 2019, Pfizer had a net debt of $44 billion. After the past two years of stunning profitability, Pfizer’s balance sheet is now cash neutral.
Two years of Covid-related cash flow wiped out all of its net debt – the equivalent of $8/share – leaving its current enterprise value (EV) of $245 billion, slightly below its EV of $260 billion at the end of 2019. Although Pfizer could spend this retained capital on biotech acquisitions, the improved balance sheet and flexibility seem to be underestimated by investors.
Undoubtedly, Pfizer will see a rapid decline in its Covid business. However, the trick will be to understand when the decline is fully discounted in stocks.
UBS downgraded the PFE last week, not because they expect the shares to trade much lower, but because there was no catalyst for an upside move. Wall Street doesn’t like when the numbers have to drop, which is the case with Pfizer’s Covid vaccine and antiviral sales.
UBS’s view: “Despite the arguably more positive growth outlook relative to our previous model, we now see PFE in a period of definite revenue/EPS declines, with risk for biased estimates at the down from when we upgraded the PFE in 2021 when the PFE was entering a period of assured high growth, with estimates on the rise.”
Pfizer held an analyst day in December to highlight its strong pipeline of drugs, primarily in five categories: vaccines, migraine, inflammation and immunology, oncology and obesity. This year, Pfizer expects to grow non-Covid revenue by 7-9%.
Bank of America believes that “launch momentum over the next 18 months has the potential to re-engage investors as Pfizer shares have underperformed their peers year-to-date.” The company is positive about the progress of its RSV vaccine and the potential for its early-stage oral obesity drug GLP-1 to compete with Eli Lilly (LLY) and Novo Nordisk (NVO).
When Pfizer reports fourth quarter results this week, they will likely have earned $6.50 per share for 2022. Consensus analyst earnings estimates call for a significant decline to around $4.30 in 2023 and $4.10 in 2024 Wall Street probably won’t set PFE much higher more than 10-11 times earnings per share until there is a clearer growth trajectory.
PFE is firmly in value territory and, by some metrics, is returning to its pre-pandemic valuation. Investors can comfortably buy the shares between $30 and $40 and collect a healthy dividend of $1.64, currently yielding 3.75%, with the stock currently trading around $43.80.
Since equities could be range bound throughout 2023, writing covered call options will add to yield. Its strong balance sheet and strong cash flow can result in a shareholder-friendly buyback of 10% of outstanding shares.
When Pfizer reports earnings on Tuesday, any additional weakness will likely present an opportunity to initiate or add to a position.
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