Shares of Pfizer Inc. (PFE, Financial) fell 15% in the month of January, ending the month on a low note with an earnings report that included a lackluster outlook for 2023. Following record revenue of $100 billion for full-year 2022, the pharmaceutical company guides for revenue between $67 billion and $71 billion in the coming year as the flow of money from its Covid vaccine and its Covid antiviral pill begin to wane.
Given the expected decline in the top line, it is no wonder Pfizer’s stock cannot catch a break, but for value investors, this is the kind of opportunity we are always on the lookout for. With the bear market in full swing, the market seems determined not to overpay for anything, which has led to Pfizer’s stock already fully pricing in the future declines in Covid revenue.
The big question is, can Pfizer emerge from the other side of its Covid-related rise and fall as a growing company, or is it doomed to keep its low valuation multiples?
Pfizer isn’t just about Covid
It is undeniable that Pfizer’s growth has been mainly fueled by Covid-related revenues ever since it developed its Covid vaccine. However, what about the other segments of the business? Can these segments continue growing once Covid revenue streams normalize to an ex-pandemic level?
Pfizer separates its Covid-related revenue from its other operation revenue, and for full-year 2022, the non-Covid-related parts of the business grew 2% collectively year over year. This is a slowdown from the 6% growth in ex-Covid businesses in 2021, but we also have to keep in mind that 2022 results included a 7% foreign exchange headwind due to the strong U.S. dollar.
The company continues to see strong operational growth for Prevnar 20, Vyndaqel and Eliquis, and in total, it had 10 medicines and vaccines that generated more than $1 billion in revenue in 2022.
Pfizer also completed its acquisition of Biohaven Pharmaceuticals in October 2022, showing its continued willingness to invest in acquiring promising treatments on top of its own research and development.
Cash injection can fuel growth and secure dividends
While caution on the impending decline of Pfizer’s Covid-related revenue is certainly merited, one often overlooked point is the cash injection has the potential to help the company grow for many years to come, giving it the financial flexibility to make key acquisitions, invest in research and development and even continue paying its dividend, which has a trailing 12-month yield of 3.64%.
Pfizer’s balance sheet is more stable than it has been since 2014 with a GuruFocus financial strength rank of 7 out of 10, driven by an Altman Z-Score of 3.57, and interest coverage ratio of 27.5 and a cash-debt ratio of 1.01.
All too often, mature drug giants can end up slowing down or even entering long-term decline due to being unable to invest sufficient funds to continue developing their pipelines. The cash from Pfizer’s Covid vaccine and treatment decreases the chances of this happening to it in the near future.
Valuation breakdown
At a price-earnings ratio of 8.49, Pfizer is just over half of its historical average price-earnings ratio. To put things into historical perspective, 2020 revenue clocked in at $41 billion, and Pfizer’s stock traded in a range of $29 to $41 for the year (the stock was not impacted overmuch by the Covid market crash and subsequent bull market due to its defensive nature and its early involvement in researching Covid vaccine candidates). Now the stock trades around $41 while projected 2023 revenue is in the range of $67 billion to $71 billion.
The GF Value chart rates the stock as modestly undervalued; note that it is not just trading below its current GF Value estimate, it is also trading below the GF Value for 2025. This estimate takes into account historical growth, past valuation multiples and analysts’ estimates of future growth (analysts from Morningstar (MORN) project revenue to decline about 14.82% per year for the next three to five years).
The vast majority of this decline will be related to Covid revenues, according to Pfizer. The company expects its ex-Covid operating business to grow between 7% and 9% in full-year 2023, which is consistent with recent years when we take foreign exchange into consideration.
I doubt Pfizer’s stock price will show much upward movement while the fall-off from Covid-related revenue is still ongoing. The stock may also be suffering somewhat of a reputational blow as Pfizer has been called out for focusing on profits when it could have saved more lives if it had waived its intellectual property rights to the Covid vaccine, thereby allowing low-income countries the ability to access the vaccine without waiting for Pfizer to finish distributing to high-income countries.
However, once everything evens out from the pandemic era, the growth in the company’s operational revenue should carry the day, boosted by strong investments in research and development and new acquisitions.
Takeaway
Pfizer has become increasingly undervalued as investors anticipate the impending fall-off of Covid-related revenue streams. When we look at the numbers as well as estimates of future growth in ex-Covid revenue streams and new pipeline opportunities, the decline in Pfizer’s valuation looks overblown. A recovery may take a while to develop – potentially as long as it takes for Pfizer’s top line to begin growing again – but investors do get a dividend yield of 3.64%, which is solid for a drug giant that is focusing its considerable cash reserves on growth.
