Pfizer Stock Valuation Analysis – Is PFE a Good Buy, Sell or Hold?

The largest (in terms of Market Cap) of its four peers, Pfizer Inc. (NYSE: PFE) has taken full advantage of its heavyweight status to build and maintain a healthy pipeline of patent-protected drugs such as Enbrel, Celebrex and Lyrica.

By its very nature, the research and development involved in bringing new treatments to market is a very cash intensive process. And with its strong cash flows, PFE is in great position to bring in a number of new drugs for cardio diseases, immunology and cancer treatments.


However, the company is facing stiff competition from generic drug manufacturers, coupled with the loss of exclusivity of blockbuster labels like Lipitor. This means that PFE will need to use every advantage it has in order to continue to innovate and stay relevant.

Given this environment within the pharmaceutical industry, shareholders might be concerned about PFE's market leadership position, and may be wondering if the shares are a buy, hold or sell?

Let's review some key fundamental and technical data for PFE that might help answer that question.

Pfizer Inc. (NYSE: PFE) Stock Analysis and Valuation Breakdown

  1. Fundamental Analysis
  2. Valuation Overview
  3. Technical Perspective
  4. Favorable Catalysts for the Stock
  5. Bottom Line Conclusion
  1. Fundamental Analysis

For its Q4-2012, PFE reported strong numbers, and achieved results that were in line with, if not slightly better than, Management's 2012 guidance. For instance, Revenue guidance was $50B to $58B, with the company reporting actual revenue at the top of the guidance range of $59B. The company had also guided 2012 Adjusted EPS (A/EPS) to come in between $2.14 to $2.17, whereas actual A/EPS was $2.19, which once again beat even the high-end of Management's guidance.  

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The better than expected results were positively impacted by the company's cost-cutting measures as well as by the gains made from the sale of its nutrition line of business. These numbers, however, would have been even better, if not for the company's loss of exclusivity for its front-line Lipitor drug, combined with foreign exchange rate differentials and the high cost of reorganization and restructuring.

On a full year basis, Revenues came in at 15.06B, down by around 6.65% from 2011 ($16.14B). However, Cost of Sales and other expenses (SI&A and R&D) came in at a combined $9.76B – 7.66% lower than the $10.57BM reported last year.

Emerging market sales were the main highlight of the company, up 20% year over year. Shareholders were encouraged to see that the company reported positive (even if comparatively lower) operational growth in all segments of its BRIC-MT (Brazil, Russia, India, China-Mexico, Turkey) marketing region. Some areas (like Brazil) reported significant operational growth in 2012 (35% Vs 14% last year), while others were stable (Mexico: 4% Vs 4%) or lower (Russia: 15% Vs 34%). Turkey however recovered significantly, showing a 22% growth over a 7% decline last year.

With further spin-offs of non-core operational assets and lines of business planned in the coming years, a strong pipeline of front-line drugs in its portfolio, and a strong balance sheet, Management is upbeat about the future. Their 2013 guidance includes Revenue projection of between $56.2B and 58.2B, and Adjusted Diluted EPS of between $2.20 and $2.30.  The planned spin-off of Zoetis is likely to lead to additional share buy-backs and potentially a dividend hike.

  1. Valuation Overview

At the time of this analysis, and based on Morningstar data, PFE seems very evenly priced compared to the Industry Average, but it looks overvalued when compared to the S&P 500.

At 22.3x Price/Earnings (P/E), PFE is not too overvalued compared to the Industry average of 18.6x, but does look to be a slightly more expensive stock from its peers on the S&P 500 index. The same conclusion can be gleaned from looking at PFE's valuation on a P/B and P/CF basis. However, on a P/S basis, PFE is trading significantly higher (3.6x) than the S&P 500 average (1.4x).

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Nevertheless, forward-looking investors would be heartened by the fact that, on a Forward P/E basis, PFE is only valued at 11.1x, almost half of its TTM P/E valuation.  The average S&P 500 index valuation for this metric is almost 14x. A PEG Ratio of 10.2 means that PFE is slightly expensive, with investors expecting to receive payback (based on current price) in about 9.6 years. However, this still compares favorably against competitor MRK, which is offering its investors a payback in 10.1 years.

Overall, based on a 5-year average of its valuation, PFE appears to be fairly valued and therefore would make a good buy proposition in a well diversified portfolio at these levels.

  1. Technical Perspective

At the time of this analysis, PFE is trading at $28.10, which according to Morningstar data, is very close to the upper end of its 52-week trading range of between $21.40 and $28.38.  Based on the 1-year stock price chart below, PFE is showing all of the positive signs that technical investors like to see in a stock. Its steady rise and the strong support at its 50-day Simple Moving Average (SMA) is a good technical indicator that the stock is on an upswing.

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The stock did break through its 50-day SMA support levels in November 2012, but found further support around its 100-day SMA, and then proceeded on its upward march. Barring any major fundamental challenges (e.g. negative news from the FDA, a major lawsuit related to any of its current top-line drugs, disappointing test results on any pf the promising pipeline drugs), the stock seems to be set to make new 52-week highs very shortly.

  1. Favorable Catalysts

With Return on Equity (TTM) and Net Margins (17.8 and 24.7% respectively) in excess of the industry averages (17.2 and 16.4% respectively),  PFE is already delivering great shareholder value. The acquisition of Wyeth was a strategic move that allows the company to wean itself from overly depending on the now non-exclusive patent of Lipitor to contribute a major portion of its revenue. Wyeth now also gives the company greater leverage in the biologic disease area, including drug portfolios for fighting Meningitis (Prevnar) and Rheumatoid Arthritis (Enbrel). With several other high-potential drugs coming online in the next few years, PFE should continue to do well against many of its competitors.

The future for PFE is however not without its headwinds. Starting from 2012, and through to 1015, PFE will be losing exclusivity on a number of its cash-generating drugs like Celebrex (for Arthritis), Geodon (for Schizophrenia) and Detrol (for overactive bladder conditions). These losses could potentially be a catalyst for other competitors, or even generic drug manufacturers, to steal market share from PFE.

Generic drug manufacturers, including from India and China, could pose serious threat to PFE's current leadership position in the global pharmaceutical industry. If the company starts losing market share, particularly in the developing economies, they may need to resort to reducing prices of some of their drugs, which would mean some margin cuts.

Drug regulators the world over, especially the FDA in the US, have now set higher thresholds for pharmaceutical companies to meet when it comes to trial and approval of newer drugs. This higher burden of proof means PFE could incur increased research and development cost for future blockbuster drugs in its pipeline. And with a higher standard for FDA approval will also come additional delays in getting new products to market.

One very significant negative catalyst for any pharmaceutical company, especially giants like Pfizer, is the constant threat of law suits and class actions. As evidenced by the multi-million dollar settlement by Merck for its Vioxx drug, the potential for such legal troubles can often add significant risk, as well as costs (insurance, litigation etc.) to research-driven companies like PFE.     

  1. Bottom Line Conclusion

Based on the above analysis, Pfizer Inc is rated as a STRONG BUY. However, due to the stock's recent meteoric rise, investors with significant positions in PFE may want to consider lightening up (SELL) some of their position to lock in profits. Those looking to jump in should consider waiting for a pullback.

(By: Monty R. – MarketConsensus News Contributor)

Good luck in your investing. Let us know if you have any questions, comments or feedback,

MarketConsensus Stock Analysis Team

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