Risk/Reward Rating: Positive
Pfizer, in partnership with BioNTech, has brought the best COVID vaccine to market this year. The vaccine is expected to bring in an incredible $26 billion of revenue to Pfizer in 2021 leading to an annual revenue growth rate of 71% versus 2020. The current valuation of Pfizer shares reflects low expectations for the company’s future.
Valuation: 11x 2021 earnings estimates and 13x 2022 estimates. Excluding the COVID vaccine business entirely, Pfizer is trading at 15x earnings estimates for 2021 and 4.9x sales.
This valuation is a fraction of the valuation of the major stock market averages. The major indices are trading between 23x and 32x non-GAAP earnings estimates (GAAP: generally accepted accounting principles). Additionally, Pfizer pays a 4% dividend yield at the current price dwarfing the income provided by the major market averages which range from 0.7% to 1.35%. The dividend yield also handily tops the yield available from much of the bond market.
The low valuation reflects a valid concern that the COVID vaccine will be a short-lived revenue stream which is likely to contract once the global vaccination occurs. This concern seems overblown here as COVID and its variants are likely to persist into the foreseeable future, requiring both initial vaccination and regular boosters to deal with mutations and maintain global immunity.
The low expectations embedded in a stock at 11X earnings cannot be overstated. When the expectation bar is set this low, positive surprises are likely which leads to upward momentum. With much of the stock market trading at record valuations, the combination of a low valuation and upside surprises should lead to outperformance.
In addition to the new product success, Pfizer has been strategically reorganizing their business portfolio for some time. This refocusing crested recently with the spinoff of Upjohn in Q4 of 2021 (merged with Mylan to create Viatris (VTRS)). They also completed the spinoff of their consumer business (now part of GlaxoSmithKline’s (GSK) consumer division which Pfizer owns 32% of today).
The end result of this portfolio revamp is that Pfizer is now a pure play biopharmaceutical company. Biotech companies tend to trade at much higher valuations versus the stock market averages over time. This is due to the incredible growth optionality that is possible. This optionality is highlighted well by the COVID vaccine product launch reaching $26 billion in one year.
It should be noted that Pfizer first invested in BioNTech in 2018, demonstrating industry foresight and capital allocation skill. BioNTech is one of many investments Pfizer has made and will continue to make. The company’s strong balance sheet and A+ credit rating provide a competitive advantage in an industry defined by fat tails in which there are many losers and a few big winners. The portfolio approach that Pfizer has taken is the optimal business model for biotech and Pfizer has positioned itself well to execute.
Finally, the company has a diversified portfolio of drugs on the market and in the pipeline across all major disease areas. This diversification limits the risk of failure that is common for smaller biotech firms. Pfizer is a blue-chip investment in the high-risk biopharmaceutical space.
Technical backdrop: Pfizer stock went parabolic in the late 90’s stock market bubble and crash. The stock has been working off these excesses for 20 years and has now formed a solid long-term base.
Pfizer max. monthly chart
Technical resistance: Current levels at the $40 area. Afterward there is no visible resistance.
Technical support: $35 to $37
Pfizer 2-year daily chart
Price as of report date 6-28-21: $39
Pfizer Investor Relations Website: Pfizer Investor Relations
Also read PFE: Pfizer is an asymmetric growth opportunity