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Pfizer spinoff opens way to revenue growth


Pharmaceutical companies have always depended on the success of their medicines, but the current race to find the first proven vaccine for Covid-19 has pushed rivalry in the sector to new levels. Pfizer (LON:0Q1N, NYSE:PFI) is currently leading the field with its German partner BioNTech, closely followed by Moderna and Astra Zeneca.

Putting aside the excitement over the race for the moment, the Pfizer share performance has had a lacklustre year. Pfizer shares finished last week on the NYSE at $37.23, which is -3.3% down over the 52-week range, though underperforming both the US pharma sector (5.6%) and the US market (20.9%). As such, Pfizer’s valuation has plenty of upside potential.

The Pfizer share price has been trading close to its 52-week high for most of the year so far. The price may break out if, as expected, the US Food and Drugs Administration grants them approval at a meeting on December 10 to discuss the application. An FT report has indicated that the Pfizer vaccine may get approval in the UK even earlier, on December 7. With these approvals in the bag, Pfizer/BioNTech would be first to claim market share and lucrative earnings.

Pfizer share price looks relatively undervalued

Pfizer’s fundamentals suggest its stock is relatively undervalued. Its price to earnings ratio (23.3x) is lower than its peers’ (22.1x) and the US market (19.7x). Analysts are forecasting an annual earnings growth this year of 4%, which is significantly less than the US market’s 22%, though future return on equity is forecast to be 26% in three years’ time, compared to the industry’s 18.1%.

Net profit margins are down on last year, from 30.5% to 17.9%, again underperforming the sector and the US market. Pfizer’s revenues, however, are trending up, growing 14% annually over the past five years. Its return on capital employed (9.8%) is marginally down on the 10.1% of three years ago.

Pfizer has a high debt to equity ratio (94.5%), a substantial increase on the 58.2% five years ago. However, the debt is well covered by operating cash flow (20.3%), while its earnings cover the interest payments on its debt (11.4X coverage).

COVID vaccine race has improved Pfizer’s outlook

Of particular interest to investors are Pfizer’s dividends, which at 4.16% put Pfizer in the top quartile among dividend payers in the US. Analysts are forecasting a slight increase to 4.4% in three years’ time, well above the industry average of 2.9%, continuing a 10-year trend of consistent growth in Pfizer dividend payments.

The race to find a Covid vaccine has certainly improved Pfizer’s outlook, though investors shouldn’t expect to see a significant stock gain from a successful roll-out. Pfizer’s fundamentals will benefit from the now-completed spinoff of its subsidiary Upjohn, which has been a drag on Pfizer’s performance for some time now. The spinoff will leave Pfizer with a $12bn cash pile, which will help reduce its debt (and interest payments) and improve revenue growth.

Sales of the Covid vaccine will boost Pfizer’s revenues, though it is worth remembering that profits have to be shared with its partner BioNTech. By contrast, Moderna owns all the rights to the vaccine it has developed. Thus the investment case for Pfizer is all about value and the stability and security of its dividends, while Moderna offers potential for growth.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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