Big pharma has really struggled over the past several years, and I think that dividend investors have been seduced by their strong cash flow without ever realizing the stocks are wildly overvalued. Pfizer Inc. (NYSE:PFE) reported lousy third-quarter earnings on Tuesday, but that doesn’t mean the stock is priced for such blah results.
Revenues rose a mere 1% to $13.2 billion, with adjusted net income of $4.06 billion, up 8%, and diluted EPS rising 10% t o 67 cents a share.
Two Key Revenue Streams
Pfizer splits its revenues into two divisions: Innovative Health and Essential Health. The IH group includes six business groups — consumer healthcare, inflammation & immunology, internal medicine (neuroscience and pain, and cardiovascular and metabolic), oncology, rare disease, and vaccines.
The IH group is performing well, with revenues up 11% to $8.11 billion. The segment is seeing huge revenue growth with some of its important drugs, like Ibrance (breast cancer treatment), Eliquis (a blood thinner), and Xeljanz (rheumatoid arthritis treatment), which saw operational revenue increases of 59%, 43%, and 49%, respectively. Ibrance generated almost $900 million in revenue, Xeljanz contributed $350 million. Eliquis added $644 million to the top line.
Those drugs are going to be the major drivers for the long term for the IH group.
PFE is seriously considering a sale or spin-off of its consumer healthcare business next year. There’s no shortage of likely suitors, considering the segment had $3.4 billion in sales last year and has a roster that includes brand names such as Advil, Centrum, and Chapstick.
Biosimilars Will Drive PFE Stock
The EH group handles non-viral anti-infectives, biosimilars, and sterile injectable medicines. The group’s revenues fell 12% to $5.05 billion, although roughly half of that was due to a major divestiture. However, there were large declines in Pristiq (an antidepressant), Lyrica (nerve and muscle pain treatment), and Vfend (fungal infection treatment).
Also dragging on the group’s results were sterile injectable shortages at Hospira, which Pfizer acquired for $15 billion in 2015.
Biosimilars are a fantastic new avenue for all of biotech. There was a 67% operational revenue increase from this segment, and it is going to be a major driver for PFE stock going forward. However, the downside is that other companies can create biosimilars to compete with PFE drugs. That’s one reason IH revenues weren’t higher – because biosimilar competition for Enbrel is making an impact. Meanwhile, Viagra is finally getting a generic, so that hurt IH results as well.
The reason PFE net income and diluted EPS rose, despite the weak revenue increase, was obviously a sizable cut in expenses. Indeed, PFE stock cut 4% out of its expenses, about $320 million worth.
The good news is that the PFE pipeline is growing more and more robust with many new launches on the way. It’s about time, because Pfizer has lost exclusivity for many products, and that slammed results with a 22% decline in operational sales.
Bottomline for PFE Stock
Of course, this takes us back to PFE stock. While the future seems to hold promise, the current situation isn’t grand. EPS for next year is pegged at $2.76 per share, and that’s about an 8% increase. However, PFE has some $18 billion of cash on hand, and its free cash flow is just fantastic and consistent.
For valuation, I take the 8% growth rate, add the 3.6% dividend, which takes us to a PE ratio of 11.6. However, I grant PFE a 10% premium for that cash position, great cash flow and world-class brand name. Thus I might be willing to pay up to 15x earnings for it.
With a stock price of $35, and earnings next year of $2.76, PFE stock trades at a PE ratio of about 13x.
I think, if you want to hold PFE stock for the long term, there are some good arguments here. The company seems to have turned the corner as far as future prospects. However, I might suggest doing a broader survey of the sector to see if you can find anything with a higher yield and higher growth rate.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].