Pfizer Inc. (PFE) recently announced third-quarter earnings of 57 cents per share on revenue of $12.36 billion. Wall Street was expecting 55 cents per share on revenue of $12.22 billion. PFE shares were at $29 going into the announcement and gained 6 cents per share for the session despite the beat of 2 cents per share.
The good news was somewhat subdued, as Pfizer narrowed it 2014 final results in the release. Pfizer lowered its full-year guidance to $2.23 – $2.27 from $2.20 – $2.30. The suit-and-ties had forecast a profit of $2.24 for the year, on average. The narrowed guidance didn’t change, as Pfizer’s “average” is still at $2.25.
Pfizer has beaten Wall Street estimates over the last four quarters by 2 cents per share, 1 cent per share, 2 cents per share and 4 cents per share, respectively. This shows that Pfizer has a feel for tempering Wall Street’s expectations.
Pfizer still has to deal with the negative impact from product losses, generic competition, exclusivity losses and termination of some of its partnerships (according to its CEO), but there is more reward than risk with PFE stock.
Pfizer is getting ready to complete a massive buyback of $5 billion of its own stock this year. As of late October, Pfizer had repurchased $4.2 billion in shares, and Pfizer said in its conference call that it still expects to reach that goal by year-end.
As far as PFE’s drugs, the recent approval of Trumenba was good news in the fight against meningococcal disease. The drug is manufactured by Wyeth Pharmaceuticals, which is a subsidiary of Pfizer.
A decent deal with Germany’s Merck KGaA(ADR) (MKGAY) could offer hope for a new cancer treatment of some kind down the road. The $850 million investment likely ruined any rumored takeover bid from Pfizer for Europe’s AstraZeneca plc (AZN), but the new chatter includes Mylan Inc (MYL) as a possible takeover candidate.
Shares of Mylan are currently trading above $56. A premium of 20% – 25% on an acquisition would have Pfizer paying between $67 and $70 a share for Mylan. The January call options for Mylan are carrying hefty premiums as a result of the elevated volatility.
Investing in takeover targets can be a risky endeavor, which is why I would shy away from Mylan’s call options. Instead, I am focused on Pfizer’s call options, as there is a chance for a much greater return by February or March.
The PFE February 33 calls are currently trading near 50 cents per share. If PFE shares can reach $34 by mid-February, the calls would be worth at least $1 for a 100% return from current levels. These Pfizer options currently have 72 days before they expire, which allows plenty of time for the trade to play out.
The PFE March 33 calls are going for roughly 65 cents per share and would be worth $1 if shares reach $34. At current levels, this would equate to a return over 50% if Pfizer shares rise 7% by mid-March. Even better, if shares of Pfizer run to $35 or 10% from current levels, these options would be $2 in the money. The March call options expire in 100 days and provide an additional month for the trade to play out.
The risk to both of these Pfizer trades emerges if shares stay below $33 and trend lower over the next two to three months. Given the recent breakout and the solid fundamentals, I like the risk and reward of both options. If PFE shares fall below $30.50, the trades could be closed to cut losses and save some premium.
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