Pfizer (NYSE:PFE) looks like it is good value here, especially since it trades well below its historical valuation parameters. This is because PFE stock has not moved much in the past year, even though it has developed a successful novel coronavirus vaccine.
Pfizer stock is up just 11.4% in the past year and is actually down about 2.7% year-to-date. The market does not seem to have much gratitude for this company, even though it saved the day with its vaccine.
What Pfizer Is Worth
Barron’s magazine pointed out in a recent article that the drug company stocks all seem to be pretty cheap.
“Most major U.S. drug stocks have badly trailed the overall market in the past year —the VanEck Vectors Pharmaceutical exchange-traded fund (PPH) is up 21%, compared with a 43% rise in the S&P 500 index. “
Moreover, the article points out that drug stocks have one of the lowest price-to-earnings (P/E) ratios of any major industry group.
For example, Seeking Alpha’s analyst survey projects that Pfizer will make $3.34 in earnings per share (EPS) this year. That gives it a forward P/E multiple of just 10.72 times.
However, historically Pfizer has not had a dramatically higher P/E ratio. Based on a table from Morningstar, in the past five years, PFE stock has an average forward P/E ratio of 13.09 times. Applying this ratio to its 2021 forecast earnings, PFE stock is worth $43.72 per share, or about 21% ahead of its price today of about $35.
We can also apply this historical metric to Pfizer’s dividend yield history. In the past four years, PFE stock has had an average dividend yield of 3.80%, according to Seeking Alpha’s dividend analysis. Pfizer’s most recent quarterly dividend was 39 cents per share. That gives it an annual dividend rate of $1.56 and a dividend yield of 4.35%. This is higher than its historical average, leaving the stock undervalued.
As a result, if we divide its dividend of $1.56 by the historical four-year average of 3.80%, the result is a target price of $41.05 per share. That represents a potential gain over the next year of 14.38%.
Therefore, if we average these two target prices, $43.72 from a historical P/E perspective, and $41.05 from historical dividend yield, the result is $42.39. That implies a potential gain of 18.1%. If we assume that Pfizer will raise its dividend per share annually, it is likely PFE stock is worth about 20% more.
What Analysts Say
Analysts on Wall Street more or less agree with my target price. Seven analysts surveyed by TipRanks.com have an average price target of $40.33 per share or 12.5% above today’s price.
Marketbeat.com reports that 14 Wall Street analysts have a consensus price target of just $39.60 or just 10% above today’s price.
These are not ringing endorsements. My projection is for 18% to 20% price gains in PFE stock, but analysts on Wall Street project just 10% to 12.5%.
What to Do With PFE Stock
In other words, PFE stock is cheap. But, if these projections come true, don’t expect to make a lot of money on the stock.
This is not to say that PFE stock could not move higher than these price targets. The market does not have to stay at the historical averages for a stock. It could easily end up with much higher price-to-earnings ratios and lower dividend yields.
But, as Barron’s points out, investors like stocks that will benefit from the return to normal life for consumers. This is despite the remarkable results from Pfizer and other drug companies. They quickly developed the vaccines that have lead to this return to normal condition.
Nevertheless, patient value investors will take advantage of PFE stock’s value. This is based on its high dividend yield and $42.39 price target, 18% above today’s price.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
