Was Q2 The Turning Point For Pfizer Stock?

With Pfizer’s sales rising in Q2, despite falling sales of Covid-19 products, we think that it may well be the turning point for Pfizer stock (NYSE:PFE). It has seen a decline of 15% from levels of $35 in early January 2021 to around $30 now, vs. an increase of about 65% for its peer, Merck stock (NYSE: MRK), over this period. In comparison, the S&P 500 has risen 45% over this period. Pfizer has seen its sales meaningfully decline to $55 billion in the last twelve months, after witnessing a massive spike to $100 billion in 2022, owing to the widespread demand for its Covid-19 products.

However, the decrease in PFE stock has been far from consistent. Returns for the stock were 60% in 2021, -13% in 2022, and -44% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that PFE underperformed the S&P in 2023. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PFE face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, Pfizer stock looks like it has ample room for growth. We estimate Pfizer’s Valuation to be $34 per share, reflecting around 15% upside from its current levels of $29. Our forecast is based on a 13x P/E multiple for PFE and expected earnings of $2.62 on a per-share and adjusted basis for the full year 2024. Although the 13x figure is lower than the stock’s average P/E ratio of 15x over the last five years, a slight decline in valuation multiple seems justified given the sharp decline in revenues lately.

Pfizer’s revenue over 2021 and 2022 surged due to a very high demand for its Covid-19 vaccine and treatment. But this trend reversed in 2023, with its total sales falling 42% y-o-y, amid lower Covid-19 vaccine demand. Lately, the company is facing increased competition for its blockbuster vaccine – Prevnar – which saw its sales growth slow to 1.6% last year versus 20.2% growth in 2022. For the six-month period ending June 2024, Prevnar sales were up 2% to $3.1 billion. On the positive side, a strong uptick in Vyndaqel and Abrysvo and a continued growth in Eliquis has aided the overall sales growth lately. Vyndaqel sales were up 68% y-o-y to $2.5 billion for the six-month period ending June 2024, while Eliquis sales were up 9% to $3.9 billion. Pfizer is also benefiting from its Seagen acquisition, which is expected to add $10 billion to the company’s top-line by 2030, compared to the $3 billion contribution expected in 2024.

Pfizer’s second-quarter results for this year were positive for the company, reflecting a 3% y-o-y rise in sales, despite lower contribution from Covid-19 products. Excluding these products, sales were up 14%. Furthermore, Pfizer is working on a cost-cutting initiative, targeting $4 billion in savings by the end of this year. This will help the company expand its net margin.

Pfizer raised its full-year earnings outlook to now be in the range of $2.45 and $2.65 per share, versus its prior guidance of $2.15 and $2.35 per share. This upward revision alone should garner a 13% uptick in PFE stock, maintaining our P/E multiple of 13x at the mid-point of the ranges above. Furthermore, if Pfizer continues to see sales and earnings grow from here, there will be a case to revise its valuation multiple slightly higher than 13x. We think investors will be better off picking PFE stock now for robust long-term gains.

[1] Returns as of 8/15/2024
[2] Cumulative total returns since the end of 2016

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