Pfizer (NYSE:PFE) is looking more and more like a really good bargain. Its novel coronavirus vaccine is going to take off over the coming year. Moreover, PFE stock still trades at very reasonable value metrics. I suspect that it will soar over the next year.
For one, Pfizer now says that its vaccine is now 95% effective beginning 28 days after the first dose. This is the result it published on Nov. 18 after the conclusion of Phase 3 trials. The Wall Street Journal reports that the vaccine was “well-tolerated in its 44,000-subject trial.” In addition, the vaccine was shown to be more than 94% effective for adults older than 65 years old.
Moreover, on Nov. 20 Pfizer just submitted, along with BioNTech (NASDAQ:BNTX), its Covid-19 vaccine to the FDA for an emergency use authorization (EUA) designation. Indications are that it will take several weeks to receive the EUA from the FDA.
The good news is that the company could begin giving the vaccine out the day after it receives the EUA. That means by mid-December it could begin vaccinating people.
The Wall Street Journal says that there will be a meeting on Dec. 10 of independent doctors and vaccine experts. This advisory panel will present its recommendation to the FDA.
Financial Implications of its Vaccine
Apparently, there will be 25 million vaccine doses available right away. Pfizer plans on using half of that supply in the U.S. That can only inoculate half of those people as two doses must be taken.
Moreover, over the next year, Pfizer and BioNTech will have 1.3 billion doses available. Pfizer also applied to other agencies around the world for EUA-type approval.
The U.S. government agreed to pay $2 billion for 100 million doses. That works out to $20 per dose. And don’t forget that the company can also license its technology to other manufacturers.
So over time, you can see that this will be extremely profitable for the company. For example, if it sold 2 billion to 3 billion doses per year, it would receive 50% of $40 to $60 billion per year, or $20 billion to $30 billion.
Most of that money would go straight to the bottom line, almost like a royalty, except for manufacturing and distribution costs. Even if the margin was 60%, that would amount to an annual$12 billion to $18 billion profit injection by year two or three.
In the last 12 months (LTM) to Sept. 30, the company made $8.7 billion in net income. That means that within several years, an additional $12 to $18 billion will be 38% to 106% increase in net income. The LTM earnings per share (EPS) was $1.54, so this would hike it to as much as $3.17 per share.
Revised Pfizer Valuation
At today’s price (Nov. 20) of $36.70, that could lower its price-to-earnings (P/E) ratio from 23.8 to 11.6 times. In other words, this vaccine development will make PFE stock very cheap. And that is not adding in any contribution to the overall Pfizer brand from the quick development of the vaccine.
This makes PFE stock very attractive. Moreover, the company currently pays a very healthy dividend. For example, its ongoing dividend of $1.52 per share gives PFE stock a dividend yield of 4.1%.
Therefore this vaccine development will allow the company to not only make its dividend more secure but likely also hike the dividend quite significantly.
Even if Pfizer raised its payout ratio to 70%, or $2.22 (i.e., 0.7 times $3.17), the new yield will be much higher. At that payout ratio, the new yield would be 6.0% (i.e., $2.22 divided by $36.70).
This effectively raises the PFE stock valuation. Over the past four years, the average dividend yield was 3.79%, according to Seeking Alpha.
Therefore, if the yield were to fall to 3.79% under this scenario, the stock would be worth $58.58. This is because if you divide $2.22 in a higher dividend per share, divided by 3.79%, the resulting target price is $58.58. That represents a potential gain of 59.6% over the present price.
What to Do With PFE Stock
Interestingly, PFE stock is down 7.6% year-to-date. The EUA designation and distribution of this vaccine will eventually lead to a significantly higher stock. My estimate is that it would be 60% higher within several years.
I suspect that the good news of the FDA EUA approval for Pfizer’s and BioNTech’s vaccine will offer an interesting investing point for most value investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.