Pfizer Inc. (NYSE:PFE) was once the can-do-no-wrong pharmaceutical giant in the market. It had a great portfolio of drugs, was making good money and paid a solid dividend. Then, in 2009, the PFE stock dividend was cut. No, it wasn’t because of the financial crisis, which is why most companies cut dividends, it was because it purchased Wyeth.
PFE Stock Today
PFE stock has tripled off its 2008 financial crisis low to $37 per share and has returned about 7% annually since then — plus dividends. Not bad. This puts it in Peter Lynch “stalwart” territory.
The question is whether PFE stock goes stagnant from here or if it is poised to grow. I think the latter may be the case, but it may take some time. Recent earnings were pretty crappy.
Third-quarter revenues increased just 1% to $13 billion and adjusted net income was $4.05 billion, increasing 8%, with earnings per share up to 67 cents, or up about 10%. Obviously, when net income rises 8% on a 1% revenue increase, the juice came from expense cuts.
Currently, PFE has two segments: Essential Health and Innovative Health.
Essential Health Segment
The Essential Health segment is active in an area I find fascinating, namely biosimilars. The U.S. Food and Drug Administration describes biosimilars as “highly similar to an FDA-approved biological product … and has no clinically meaningful differences in terms of safety and effectiveness.”
Biological products are manufactured using living cells and not synthesized. A McKinsey study reported back in 2012 that there could be over $20 billion in biosimilar revenues from the five most popular patented antibody drugs. Total biosimilar penetration for the markets of off-patent biologics might hit 50% in 2020 — creating tens of billions in revenues.
PFE’s Essential Health division deals with biosimilars, as well as non-viral, anti- and sterile injectable medicines. However, this division’s revenues dropped 11.9% to $5 billion, though about 50% of that was the result of selling off several items.
Biosimilars, however, generated a 66% operational revenue increase. We will see more from biosimilars, even though other pharma houses can make biosimilars for the same drugs.
Innovative Health Segment
The Innovative Health group has six business segments, where revenues increased 10.9% to $8.09 billion. Three main drugs are providing revenues here and PFE may have 10-15 new drugs coming down the pipeline. Innovative Health is potentially the major revenue source for Pfizer stock going forward.
Currently, it appears that PFE wants to sell off its consumer unit. Johnson & Johnson (NYSE:JNJ) has passed on the acquisition. It would be great if a buyer can be found, because it’s probably worth about $20 billion. It would be nice to make a dent in the $35 billion of debt PFE stock carries. $20 billion is a lot, but the unit put up $3.3 billion in sales in 2016.
What It All Means to PFE Stock
So, PFE has some good times ahead, but what about right now? EPS for 2018 is expected to be $2.77 per share, up 7.9%. PFE also has $25 billion of cash and investments and generates a health $13 to 15 billion in free cash flow every year.
With PFE growing earning at 8%, paying a 3.7% yield and giving its PE ratio a 10% premium for its robust cash flow, world-class brand name and cash hoard, I would consider paying up to 13-14 times for PFE stock. It trades right at 14x.
Hence, with good times ahead, now may be a reasonable time to open a position in PFE stock.
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 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
