Pfizer (PFE, Financial) shares have seen better days as the stock is down 20% year-to-date. This is an undeniable underperformance compared to the broader stock market, as the S&P 500 is up 8% year-to-date. I consider this weakness now to be an excellent value opportunity considering Pfizer's defensive characteristics and the cash infusion from Covid-related sales, which should help boost research and development even as Covid sales tailwinds fade.
Pfizer remains a high-quality defensive play
The theory that says low beta stocks will gain less than the broader stock market in periods of market rallies has proven correct as Pfizer has seen its shares not only gaining less but, on the contrary, having losses year-to-date. However, I consider this to be the so-called outlier effect of the pandemic, as the stock soared from $31 in June 2020 to $59 by December 2021 on the back of enthusiasm for Pfizer's Covid vaccine. Then, investors began pricing in future declines in Covid sales, causing the stock price to tank.
Despite the Covid-related volatilty, Pfizer has a stable portfolio of income-generating pharmaceuticals. The cash from Covid should help it invest in further developing its pipeline.
Pfizer is also an excellent stock for income. The forward dividend yield of 4.02% is almost three times higher than the average Health Care industry yield of 1.58%. With a forward payout ratio of 42.39% and 12 years of dividend increases, Pfizer's dividend looks sustainable.
Pfizer is not a value trap
Some pundits may be claiming that Pfizer is a value trap due to declining Covid-related sales, but I don't think this is the case. What makes a stock a value trap? Honestly, it depends on your personal opinion. There many definitions, but the one that I like to follow is the one from Wall Street Mojo, which uses six factors to identify value traps: “Available at Attractive Price compared to Valuation Metrics, Inconsistent Profit, No Future Planning, No Control Over Cost, Bad Management and Accounting Issues."
Pfizer does not fit with any of the above-mentioned factors except for an attractive price, as the stock is very cheap now in terms of its valuation ratios. The price-earnings ratio of 7.47 is less than the three-year average of 18.56, the price-to-free-cash-flow ratio of 8.97 is less than the three-year average of 11.59 and the price-book ratio of 2.40 is also less than the three-year average ratio of 3.57.
The investment in Seagen is expected to strengthen market share in oncology
Pfizer recently announced that it has made a deal to “acquire Seagen (SGEN, Financial) for $229 per Seagen share in cash, for a total enterprise value of approximately $43 billion."
“Pfizer is deploying its financial resources to advance the battle against cancer, a leading cause of death worldwide with a significant impact on public health,” said Dr. Albert Bourla, Pfizer's CEO. "Together, Pfizer and Seagen seek to accelerate the next generation of cancer breakthroughs and bring new solutions to patients by combining the power of Seagen’s antibody-drug conjugate (ADC) technology with the scale and strength of Pfizer’s capabilities and expertise. Oncology continues to be the largest growth driver in global medicine, and this acquisition will enhance Pfizer’s position in this important space and contribute meaningfully to the achievement of Pfizer’s near- and long-term financial goals.”
According to Allied Market Research “The global oncology drugs market size was valued at $135,494.17 million in 2020, and is projected to reach $274,400.63 million by 2030, registering a CAGR of 7.5% from 2021 to 2030. Cancer is the third most lethal disease in the world after cardiovascular, parasitic and infectious diseases.”
The oncology market is a very large market and Pfizer is expected to gain not just considerable market share but also create incremental sources of revenue. Pfizer has recently announced “a strategic cooperation pact with China's Sinopharm" and plans to seek approval to market 12 innovative drugs in China through 2025.
It is also notable that Pfizer has a vast product pipeline, 105 in total, with 34 products in Phase 1, 37 in Phase 2, 23 in Phase 3 and 16 in Registration.
The revenue growth is slowing, but that won't last forever
It can be argued that a slowdown in revenue growth is bad news for a company, but there are exceptions to this rule. In Pfizer's case, there was an outlier even (Covid-19) that created a distortion to its long term financial trends. These kinds of events happen a lot in pharma and can also occur when a company releases a new blockbuster drug.
Pfizer witnessed a revenue growth of 95.16% to $81.29 billion in 2021 and 23.43% to $100.33 billion in 2022. In the previous years from 2015 to 2019, Pfizer had reported a maximum revenue growth of 8.13% in 2016 and a minimum growth of -22.31% in 2018, with the remaining years being more normal ranging between -1.52% and +0.85% in terms of revenue growth.
The pandemic created a huge market opportunity for Pfizer, and while the abnormal revenue growth led to equally abnormal profitability growth, it is not reasonable to expect this trend to continue. This is not itself bad news, as it was an outlier period. As usual, the market is overreacting in both directions.
Overall, I believe shares of Pfizer are very attractive at current prices because the company has a strong pipeline, cash to invest in research and acquisitions and a vision to become a leader in oncology. I think the stock has a good chance of seeing much better days in the near future, and the dividend doesn't hurt.
