Pfizer (NYSE:PFE) has been one of this year’s most surprising stocks, but not in a good way. Just from the headlines, you’d think Pfizer stock was a major winner.
After all, the company has played a pivotal role in getting one of the first approved novel coronavirus vaccines working and ready for the general public at record speed. But that scientific success hasn’t translated to its share price.
In fact, PFE stock has done essentially nothing; it’s up just two percent year-to-date.
Yes, PFE stock did jump a bit in November, reaching its highest level since 2018. However, shares have fallen back once again.
That underperformance is particularly disappointing given the massive run that the stock market as a whole has enjoyed. Before you get too worried about Pfizer, however, here’s the good news for the company’s outlook.
Vaccine Approval and Pfizer Stock
The Food and Drug Administration (FDA) granted Pfizer approval for its Covid-19 vaccine. Pfizer, along with partner BioNTech (NASDAQ:BNTX), created the Covid-19 vaccine named BNT162b2. BNT162b2, along with Moderna’s (NASDAQ:MRNA) competing vaccine, are likely to secure the majority of the overall market.
Given the severity of the disease, time is of the essence. Most countries will elect to pick a vaccine that is already available, such as Pfizer’s, rather than waiting to see what else may come onto the market at a later date.
The Pfizer vaccine has some limitations, such as requiring two doses and very cold storage to transport it. This will limit its market uptake to some degree. Still, analysts project that it should easily be able to clear $10 billion in sales next year. That’s truly an extraordinary figure.
Limited Impact on Valuation
The Covid-19 vaccine success is a landmark achievement for Pfizer and BioNTech. It validates their R&D platforms and ability to commercialize key products swiftly. So let’s not downplay the historic achievement whatsoever.
That said, as far as Pfizer’s actual business goes, this vaccine isn’t really a game-changer. We’re probably looking at something like $10 billion to $15 billion of vaccine sales next year, with that number sharply dropping in future years once a large chunk of the population already has immunity.
Meanwhile, Pfizer produces $49 billion of revenue per year as is, and generated more than $8 billion of net income last year. Adding another $15 billion of vaccine revenue to the mix for a couple of years — even at a high profit margin — doesn’t necessarily add that much to the pie.
Seeing the Bigger Picture
While that might explain why PFE stock hasn’t been a huge winner in 2020 despite the vaccine success, it does speak to Pfizer’s strength more broadly. There are few companies that could launch a new product like the Covid-19 vaccine and not have it make a huge impact on earnings.
However, as one of the world’s largest pharma companies, Pfizer stock is not reliant on any one drug or product line to make up the lion’s share of its earnings.
That gives it all sorts of internal diversification. Furthermore, Pfizer can shrug off the loss of drugs due to patent expiry or something in the pipeline not working. While Pfizer’s huge size limits its upside from any one particular success, such as this Covid-19 achievement, it also keeps investors safe from periods of bad luck as well.
Looking more broadly at the numbers, PFE stock is trading for less than 13x forward earnings. That’s not just a product of this vaccine either.
In fact, analysts see Pfizer’s earnings per share coming in between $2.86 and $3.04 for full year 2020, 2021, and 2022 respectively, demonstrating the stability at the core of the company’s business. Given its strong earnings power, Pfizer is also able to offer a juicy 4.1% dividend on its shares, as well.
Pfizer Stock Verdict
It’s easy to look at Pfizer’s stock price and think there’s something wrong with the business. After all, if shares aren’t going up now on the heights of a massive scientific advance, when will they rally?
The truth is, however, that Pfizer is simply so big that any one new product isn’t really going to move the needle. The bigger issue is simply that large value stocks, like Pfizer, have been largely out of favor lately. People are flocking to growth and tech stocks instead.
At some point, that will flip and PFE stock will take off. Generally, high-quality businesses like Pfizer don’t stay at 12-13x earnings forever, after all.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
