Pfizer Inc. (NYSE:PFE) isn’t the sexiest stock in the market, but that doesn’t mean investors shouldn’t be interested. PFE stock is up more than 2% in 2017, but down nearly 10% over the past year. Now may be as good a time as any to consider initiating a position in the drugmaker.
Pfizer is probably best known for Viagra, but it’s got other brands, too, such as Eliquis, Lipitor and Celebrex, among others. Shares pay out a fat dividend too, with a yield approaching 3.9%.
For those who aren’t long already, the dividend is surely an enticing first bait. But, there’s other key qualities to the stock. Trading with a price-to-earnings ratio of 28 isn’t one of them. However, trading at just 12 times forward earnings estimates is quite exciting.
The respective earnings forecasts call for 6.2% and 7.5% growth in 2017 and 2018, respectively, which is good, but not great. For a near-4% yielder with a forward P/E ratio of 12, though, it’s hard to ask for much more than mid-single-digit earnings growth. In other words, this is more than acceptable growth and appears dependable.
However, a longer term look at Pfizer’s net income may cause some concern. PFE is generating the same amount of income it did in 2011. It’s gross margin is also near similar levels as its 2011 trough.
Therein lies the silver lining: Although PFE is having flashbacks to the year 2011, it’s also likely to be near a bottom. There are other positives, too. Although gross margins may be near its 10-year lows, operating margins of 26.25% are a little more than double its 2011 levels.
The Balance Sheet
A low valuation and fat dividend are good, but a flexible balance sheet is nice too. One issue many investors have with Pfizer is its top line growth. Although pharma companies may be the first out with a new impactful drug, doesn’t mean they get to keep it forever.
It’s not like when The Coca-Cola Co(NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) developed their secret formulas. In the pharmaceutical world, drug companies only have exclusivity with their drugs for so long. And while they get to keep the identifiable brand name — again, think Viagra in this case — generic brands erode market share and often times margins as well.
So while Pfizer may be growing earnings at an acceptable rate, stifled revenue growth is a concern. Currently, analysts expect a 0.1% contraction in revenue in 2017 and just 2.6% growth in 2018. An acquisition should change that. Without sales growth, Pfizer cannot withstand any price erosion in the drug market. It will shrink margins and cause earnings to wilt, causing investors to dump the stock.
That’s why big pharma companies often turn to M&A. With its near-$200 billion market cap and history of acquisitions, we know Pfizer is constantly on the search for new deals. It’s only a shame that the deal to acquire Allergan plc (NYSE:AGN) didn’t work out, given its impressive growth and brand names. Recent rumors have PFE acquiring Bristol-Myers Squibb Co (NYSE:BMY).
At $92 billion, it’s more than a drop in the bucket and PFE would have to pay a premium on top of that. Of course this is just speculation, but some say there would be notable synergies in the deal. It would add to PFE’s portfolio of stable lineups and earnings, but would not add the impactful sales growth that some investors may be craving.
Its immediate impact would of course boost PFE’s overall sales figures. But BMY itself is not a robust sales growth company, so the year-over-year comparable figures would have a limited impact. Despite this, BMY is still an excellent company.
The Bottom Line on PFE Stock
With or without BMY, PFE has shown it’s no rookie in the M&A arena. I have little doubt the company will turn to acquisitions as it so often has. In the end, PFE is a good stock, not a great one. That doesn’t mean we should stay away, it just means we need to know what to expect.
Income would be a large catalyst in getting long PFE. That 4% yield is almost double what a 10-year Treasury will pay you. Its low valuation ensures that PFE stock has somewhat limited downside, particularly if it’s able to maintain its margins.
Going into Pfizer earnings, investors may want to consider buying a half position now and the other half later. If it rallies uncontrollably, we have a low cost basis. If it falls and there’s no meaningful deterioration in the business, we can lower our cost basis by adding to our position.
When it comes to PFE stock, it’s got stable support above $33. Prior resistance should now act as support (purple line), while its trend line (black) should also act as support.