georgeclerk
Pfizer Inc. (NYSE:PFE) has been in a major downtrend since late 2021 as the pandemic boom of Covid vaccinations started to decline. The bears have some valid concerns, but it appears that the negative sentiment has overshot reality. I have a fairly neutral view of the company, but I like the stock itself when I look at the fundamentals without any emotion. Pfizer shares were trading around $60, about two years ago, and now trade for less than half that level. The current share price is near 52-week lows and the valuation and negative sentiment kind of reminds me of when the market was overly (way overly) negative with Meta Platforms (META). Sentiment is a huge and emotional factor that can create big disconnects in either way, undervaluation and overvaluation. We saw the undervaluation in Meta Platforms, and we might be seeing overvaluation in some AI related stocks right now. At any rate, the fundamentals of Pfizer currently seem to suggest that sentiment is too negative and the valuation is too low. With this in mind, let’s take a closer look:
The Charts
As the chart below shows, Pfizer shares reached a 52-week low around $25 in mid-December. This could have been caused by tax-loss selling but also by Pfizer announcing it was reducing guidance for 2024. The combination of negative news on 2024 guidance and tax-loss selling season hit the shares hard, but have since started to recover a bit. The shares now trade right around the 50-day moving average which is about $27.72 per share. The shares remain well below the 200-day moving average which is around $32 per share. With some good news coming from the company, or if sentiment improves a bit, a likely upside target for the stock would be the 200-day moving average.
stockcharts.com
I also want to look at another chart below which shows the 200-week simple moving average, which is indicated with a brown line. This shows a 200-week simple moving average is around $29.59, and that means Pfizer shares have (slightly) violated what should have been a very strong support level since it is currently trading below that level. This is a concern, however it is not unusual for stocks to slightly violate major trend lines and then recover. Since the 200-week simple moving average covers a much longer span of time, I am not overly concerned with what might be just a temporary violation of this key support level. On the other hand, taking a more bullish view of this chart, one could see that buying Pfizer shares when the stock was at or near this 200-week simple moving average has paid off for investors in the past. For example, Pfizer shares hit the 200-week simple moving average in 2013, 2014, 2015, and then again in 2020 (ironically when the market plummeted at the onset of Covid), and in each of these examples the stock bounced off this level. It remains to be seen if Pfizer shares will bounce again from this level, but history seems to suggest that this is a buying opportunity and that it will bounce again. I feel this violation in the 200-week simple moving average is temporary and just a sign of an overshoot to the downside based on overly negative short term sentiment. Based on the chart and fundamentals, I believe this could be one of the best buying opportunities for Pfizer shares in many years.
finviz.com
The Pipeline
I think too many consumers and investors still associate Pfizer only with Covid vaccines. Pfizer was much more than just Covid vaccines before the pandemic hit and it will likely be much more than that going forward. The company now appears focused on solutions for cancer, which is something everyone can get behind. Pfizer says that (as of Q4, 2023) 40% of its research and development budget “is focused on advancing innovative cancer therapies”. The company has clinical trials for advanced bladder cancer and in 2023, it acquired Seagen which doubled the number of clinical trials in cancer. Pfizer now has 49 trials in various phases, so even if most of these fail, there is also a significant chance for one or two potential breakthrough treatments which would be great for people as well as shareholders. Sixteen of these trials are now in phase 3, which shows that a significant portion of the pipeline is in the advanced stages. Pfizer is also focused on treatments for RSV as well as other ailments. Overall, I like the pipeline’s renewed focus on cancer and this could lead to some future breakthroughs and product revenues. It could also help remind investors that this is not just a Covid stock.
Earnings Estimates
Analysts expect Pfizer to earn $2.22 per share in 2024, $2.78 per share in 2025, and $2.88 per share in 2026. I view 2024 as a transition year for Pfizer, especially as it becomes less dependent on Covid vaccines and also as it digests expenses from the Seagen acquisition. But, even at 2024 EPS estimates, this stock only trades for about 12 times earnings. Once we get into earnings estimates for 2025 however, the price to earnings ratio is just under 10, which makes the shares appear even more undervalued.
The analyst community seems to be taking note of Pfizer’s valuation and future prospects and appear to be increasingly bullish. For example, Cantor Fitzgerald analyst Louise Chen was recently on CNBC stating that she sees the potential for $5 per share in earnings and a $45 to $50 per share price target for Pfizer. On February 23, Seeking Alpha News Editor Dulan Lokuwithana detailed a new $36 price target from Guggenheim analyst Vamil Divan for Pfizer shares. This analyst feels that near-term estimates could rise along with the share price, the Seeking Alpha article states:
“He specifically pointed to Padcev, an antibody-drug conjugate Pfizer (PFE) added with its Seagen (SGEN) acquisition last year, and the company’s newly launched RSV vaccine, Abrysvo.
Divan also argued that clinical wins for PFE’s other pipeline assets, including its experimental breast cancer therapy vepdegestrant developed with Arvinas (ARVN), Lyme disease vaccine candidate VLA15 developed with Valneva (VALN), could lift investor sentiment.”
The Dividend
Pfizer pays a quarterly dividend of 42 cents per share, which totals $1.68 per share on an annual basis. This provides a yield of over 6%, which beats most stocks as well as most money market funds, and even many REIT stocks. The dividend appears safe as it remains well below earnings estimates for this year and beyond. In addition to this very generous yield, investors can probably look forward to small but consistent dividend increases since this has been the historical norm. Back in 2014, the quarterly dividend was 26 cents per share, and thanks to consistent increases, it has risen by about 60% in the past decade. The next quarterly dividend is scheduled to occur around mid-May.
The yield of more than 6% makes this stock attractive because you are getting paid very well to wait for a potentially higher share price. As we all know, the Federal Reserve is contemplating the end of the rate hike cycle and could be cutting interest rates later this year. Lower rates should make Pfizer shares move higher and I don’t think enough investors are factoring this into the bullish investment thesis for Pfizer. A recession could cause a dramatic drop in interest rates, and since pharmaceutical companies are recession-resistant, investors could have renewed interest in Pfizer as rates drop and as investors seek to invest in defensive (recession-proof) sectors of the market.
Potential Downside Risks
Issues with existing treatments and/or pipeline candidates failing clinical trials is one of the biggest downside risks when investing in a stock like Pfizer. However, it has a broad revenue base and pipeline so that helps to mitigate these risks. Since 2024 is an election year, there is potential downside risk from politicians who seem to step up discussions about drug pricing and other potential regulations, so this is something else to consider over the next few months.
Upside Catalysts For Pfizer
I see many potential upside catalysts for Pfizer shares. Based on the 200-week simple moving average, this stock appears due for a rebound. It also could rise as more investors and analysts seem to be taking the view that the selloff has gone too far. Company specific news could also boost the shares, such as positive developments in clinical trials. A reduction in interest rates and even a recession could boost investor interest in Pfizer shares as well. Over time, the association Pfizer has with Covid vaccines is likely to fade and that could give rise to more positive sentiment for the company and the stock.
In Summary
Covid and the debate over vaccinations seems to be fading, and over time it seems that Pfizer will go back to being known for a pipeline that treats everything from cancer to RSV. This could help boost investor sentiment. There appears to be multiple upside catalysts and the shares seem very undervalued. The 6% yield and the history of dividend increases over time makes this stock appealing for income investors. However, other factors such as declining interest rates in the future as well as rising earnings should help move this stock to much higher levels and give investors capital gains on top of the compelling yield it currently offers.
I have recently been buying Pfizer shares and I plan to keep doing so on weakness. From time to time, I also plan to sell put options in order to potentially buy below the current market price. In addition, I might sell call options after I have a larger position in the stock in order to potentially benefit from option premiums, but only on a portion of my total position. Overall, I think this an ideal opportunity to accumulate Pfizer shares and get paid more with dividends than cash currently earns.
No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
