Initiating Coverage of Pfizer (PFE)

Buy Rating. Price Target of $30.

As the COVID-19 pandemic receded, Pfizer’s sales and profits fell sharply.  Combined sales and alliance revenues of COMIRNATY, the COVID vaccine, and PAXLOVID, the COVID oral antiviral, fell 78% to $12.5 billion in 2023.  Some of the declines were due to one-time inventory management issues associated with the transition from governmental emergency use authorization to commercial use.  Nevertheless, the sales drop had a big impact on Pfizer’s bottom line.  2023 GAAP diluted EPS was $0.37, down from $5.47 in 2022 and adjusted (non-GAAP) diluted EPS was $1.84, down from $6.58.

The drop in sales and earnings sparked a 43.8% drop in Pfizer’s share price in 2023, grossly underperforming the S&P 500’s 24.2% advance and the NYSE ARCA Pharmaceutical Index’s 4.9% rise.

Pfizer, like many of its large cap peers, has reshaped its business over the past several years, jettisoning OTC consumer products and established brands (i.e. drugs which have lost patent protection) to focus on proprietary medicines.  At year-end 2023, it acquired Seagen, a leader in antibody drug conjugates (ADCs), a next generation treatment for cancer.  With the acquisition, the company has restructured its organization, creating an Oncology division by merging Seagen with its own oncology operations.  It has also formed the U.S. and International Commercial divisions to manage the rest of its business.

2024 will be a year of execution and integration following the adoption of its new organizational structure and as it pursues more operating cost reductions.  With a lower baseline of COVID-related revenues, the addition of Seagen and a reclassification of royalties from other income, management expects revenues to be flat to up 3.4% in 2024 and adjusted EPS of $2.05-$2.25, up from $1.84 in 2023. Pfizer’s legacy business is expected to earn $2.45-$2.65, partially offset by $0.40 of dilution from the Seagen acquisition.

My projections are in line with management’s guidance.  I anticipate 2024 revenues of $60.3 billion, near the midpoint of guidance, and adjusted diluted EPS of $2.23, just below the high end of guidance.

Pfizer’s earnings have fallen faster than it share price, so its valuation multiple has actually increased.  The stock is currently valued at 12.0 times projected 2024 adjusted EPS of $2.23 and 11.3 times projected 2025 adjusted EPS of $2.36.  That compares with the peer group average (excluding LLY) of 12.7 times projected 2024 earnings and 11.4 times projected 2025 earnings.

The large cap pharmaceutical sector trades at a discount to the S&P 500’s forward valuation of 21.7 times projected 2024 (non-GAAP) operating earnings.  That discount reflects investor uncertainties regarding looming patent expirations, government efforts to reduce pharmaceutical costs and intense industry competition.  Although Pfizer’s valuation discount vs. peers is small, its poor relative performance over the past two years or so suggests reasonable upside if the company is able to realize the potential from Seagen and other recent acquisitions and begins to demonstrate progress in improving its profitability.

My price target of $30 assumes a one-year forward multiple of 12.5 times projected 2025 adjusted EPS of $2.36, modestly higher than the current 12.0, but slightly below the current peer group average 12.7.  Along with its fat dividend yield of 6.3%, the price target represents a potential total return of 18.8%, which merits a performance rating of “1” (Buy).

The high dividend yield reflects investor concerns about the sustainability of its dividend.  Pfizer did not generate sufficient free cash flow to cover its dividend payment in 2023.  My projections anticipate free cash flow coverage of the dividend will improve but remain below 1.0 in 2024 and rise above 1.0 in 2025.

This is a summary of my primary report on Pfizer Inc. (PFE). To obtain a copy of the full report, please reach out to me using the contact information provided below.

April 8, 2024. (Report published on April 6, 2024)

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

© 2015-2024 by Stephen P. Percoco, Lark Research.   All rights reserved.

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