Here’s Why Pfizer Stock Looks Inviting At $39 Levels

Pfizer’s stock (NYSE: PFE) is up just 3% since the start of the year and it has gained around 45% from its March lows. Despite the recent rally, Pfizer could offer an upside in the near term, as the company’s revenues and earnings are expected to see strong gains going forward. While the comparable sales were down 3% in the first nine months of 2020, it can largely be attributed to the impact of Covid-19, which has reduced doctors’ visits and delayed patients from seeking care. The development of a vaccine could end the pandemic and help to revive demand for other pharmaceutical products. Pfizer’s own Covid-19 vaccine was recently approved in the U.K. and the vaccination will begin as early as next week. This should also support the sales growth for Pfizer in the near term. In fact, Pfizer’s Covid-19 vaccine peak sales are estimated to be as high as $3.5 billion in 2021. This is likely to bolster the revenue growth rate of the company in the near term – leading to stock price growth.

PFE stock has rallied from $27 to $39 off the recent bottom compared to the S&P which moved 61% over the same time period. Better than estimated earnings in Q2 and Q3 has helped PFE stock rally over the recent months. Moreover, the stock is up just 10% from levels seen in early 2019, more than a year ago. While PFE stock has fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, and despite the 45% rise since the March 23 lows, we feel that the company’s stock still has potential as it will benefit from its restructurings – spin-off of consumer healthcare business as well as generic drugs business – and the high demand for its Covid-19 vaccine. Our dashboard ‘Buy Or Sell Pfizer Stock provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last year or so is justified by the roughly 54% growth seen in Pfizer’s EPS from $1.90 in 2018 to $2.92 in 2019. Though the revenues declined 3.5% from $53.6 billion to $51.8 billion, it was due to the de-consolidation of its consumer healthcare business. Pfizer’s Net Margins expanded 51% from 21% to 31%, primarily due to a one-time gain of $8 billion from the consumer healthcare transaction. This clubbed with a 5% reduction in total shares outstanding due to share repurchases led to strong earnings growth. The Net Margins stood at 25% for the first nine month period in 2020.

Finally, Pfizer’s P/E ratio contracted from 23x in 2018 to 13x in 2019. While the company’s P/E is still at around 13x trailing earnings, it could see further expansion given the market share gains for some of its drugs, including breast cancer treatment Ibrance, as well as margin expansion after the de-consolidation of its low-margin businesses, driving the earnings growth in 2021 and beyond.

How Is Coronavirus Impacting PFE Stock?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower sales for pharmaceutical companies, such as Pfizer. However, while Pfizer will benefit from its recent restructuring initiatives, the Covid-19 vaccine may not have a great impact on the stock in the near term. Pfizer has agreed to supply the U.S. government with the vaccine at about $19.50 per dose, and it’s possible that average prices could be well below this, considering that pricing might be lower in emerging markets. Also, vaccines traditionally have lower profitability versus prescription drugs. Combined with the large public interest in facilitating vaccine access, these margins may face even more downward pressure. Considering that the vaccine is co-developed with BioNTech, any profits will likely be shared. As such, we are not counting on the vaccine to drive the stock price in the near term.

What we consider important for Pfizer is its restructuring, with a spin-off of its consumer healthcare business and its generic drugs business. 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. For perspective, Humira’s annual sales alone are close to $20 billion and there is a huge market potential for Pfizer’s biosimilar. While the Covid-19 vaccine will surely aid the sales growth in the near term, the company’s biosimilars and Ibrance will likely drive the sales growth in the medium to long run. Now with economies opening up, Pfizer can see expansion of sales for these drugs.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of $39, PFE stock is trading at 13x its 2021 estimated adjusted earnings of $2.88, in-line with the 13x multiple seen over the recent years. However, now with de-consolidation of low margin businesses, Pfizer’s earnings growth will be higher compared to prior years, and this will likely result in expansion of its multiple, implying the stock could see further gains from the current levels.

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