Investors face a conundrum when evaluating companies that have benefited from the Covid-19 pandemic.
A partnership with Pfizer (PFE) and BioNTech (BNTX) to develop a vaccine and its antiviral agent, Paxlovid, has led to significant revenue and balance sheet growth over the past two years. The market is already rightly discounting his Covid-related sales decline built into PFE’s 7x price/earnings multiple.
But with Pfizer’s stock already down about 15% in 2023, is the market over-discounting PFE and undervaluing the pipeline and remaining Covid gains?
A closer look at Pfizer’s financials makes it clear. In 2022, a whopping 40% of Pfizer’s revenue was Covid-related, $40 billion out of $100 billion in total revenue.
Astonishingly, Pfizer had $44 billion in net debt at the end of 2019. Pfizer’s balance sheet has become cash neutral after staggering profitability over the past two years.
Two years of Covid-related cash flows have wiped out all net debt (equivalent to $8 per share) and now have an enterprise value (EV) of $245 billion, just short of the year-end 2019 EV of $260 billion Pfizer can spend this retained capital on biotech acquisitions, but the improvement and flexibility of its balance sheet appear to be undervalued by investors.
Undoubtedly, Pfizer will witness a rapid decline in its Covid business. The trick, though, is understanding when a stock decline is fully discounted.
UBS downgraded PFE last week, not because it expects the stock to fall sharply, but because there has been no catalyst for a rally. Pfizer’s He said Wall Street hates when numbers need to go down, as do sales of Covid vaccines and antiviral products.
UBS view: “Despite a arguably more positive growth outlook compared to our previous model, PFE has seen periods of certain earnings/EPS declines compared to when PFE was upgraded in 2021. So we can see that the risk to the estimate is skewed downwards, we’re moving into a period of solid high growth and the estimates are upwards.”
Pfizer held its Analyst Day in December to highlight its strong drug pipeline in five key categories: Vaccines, Migraine, Inflammation & Immunology, Oncology and Obesity. This year, Pfizer expects revenue to grow 7% to 9% excluding Covid.
Bank of America believes that “pfizer’s stock has underperformed its peers year-to-date, and the launch momentum over the next 18 months could rekindle investors.” The company is positive about vaccine progress in RSV and the potential of an oral GLP-1 obesity drug in early development to compete with Eli Lilly (LLY) and Novo Nordisk (NVO).
When Pfizer reports fourth-quarter earnings this week, 2022 earnings per share could be $6.50. Analysts’ consensus earnings estimates expect him to drop significantly to around $4.30 in 2023 and $4.10 in 2024. Earnings per share could be 10-11x or more until a clearer growth trajectory emerges.
PFE is firmly in value territory, returning to pre-pandemic valuations by some measures. can be obtained. The current yield is 3.75% and the stock is currently trading at around $43.80.
Stocks may be range-bound throughout 2023, so creating a covered call will increase returns. Its strong balance sheet and abundant cash flow allow for favorable share buybacks for his 10% of outstanding shares.
Additional weakness could prove an opportunity to open or add positions when Pfizer reports earnings on Tuesday.
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