Introduction
Over the past few weeks, I have often told people I’m getting a 2021 feeling, as the market is rapidly rising, boosted by a few select tech/growth stocks.
Meanwhile, crypto assets are flying again, boosted by Federal Reserve rate expectations that may not be fully justified in light of sticky inflation.
The other day, Bloomberg wrote an article titled The Casino Crowd Is Back Across Markets With Soft Echoes Of 2021.”
According to the article, retail investors, who largely remained on the sidelines during last year’s market fluctuations, have made a comeback.
This resurgence is supported by an increase in demand for bullish call options and the returning demand for momentum trading strategies.
As a result, Apollo Management Chief Economist Torsten Slok is making the call that the Fed may have to refrain from cutting rates this year.
“The market’s just fighting the Fed and winning right now,” Emily Roland, co-chief investment strategist at John Hancock Investment Management, said in an interview. “There’s still euphoria, even though the Fed is kind of pulling away the punch bowl.” – Via Bloomberg
While the rate cut decision depends on a wide range of variables, I do not disagree that the hype may have gone a bit too far.
In general, I am very displeased with opportunities on the market. As some of my more regular readers may know, I’m now mainly buying deep-value stocks like energy, which I consider to be cheap in a somewhat expensive market.
As we can see below, all major valuation measures are above the 30-year average.
Generally speaking, this indicates subdued longer-term returns. The cheaper the market, the higher the implied future return.
Hence, I’m looking for value stocks, which are extremely cheap compared to growth stocks and likely to do well if rates remain elevated. The chart below visualizes both of these statements.
One value stock I have really started to like is Pfizer (NYSE:PFE).
Due to severe recent stock price weakness, the stock has now returned less than 2% per year since 2004!
Usually, I stay far away from these companies, as I prefer consistent wealth generators.
My most recent article, which was written on December 3, 2023, was titled “Pfizer: Between Hope, Despair, And A 5.7% Yield.”
Since then, shares are down another 7%, including dividends.
PFE now yields 6.3% and trades close to 10x earnings.
While it certainly has its issues, I am very bullish on its future, as it seems to be working on an impressive turnaround, focused on major growth markets.
In this article, we’ll discuss all of this and assess what makes PFE such a good stock in a market that increasingly favors (deep) value stocks.
So, let’s get to it!
I’m Starting To Like The Pfizer Dividend A Lot
The biotech/drug manufacturing space is tricky. It’s full of pitfalls like patent loss risks, innovation/pipeline risks, competition risks, and general risks like interest rates, economic sentiment, and whatnot.
Without looking into the future(!), there aren’t good reasons to buy Pfizer. It is no major player in the weight loss (GLP-1) space. It does not benefit from pandemic-related vaccines anymore, and it needs to figure out how to maintain growth in light of patent losses.
There are so many better plays on the market, which is why PFE has underperformed the healthcare ETF (XLV) by a mile.
With that in mind, the company’s underperformance started in 2022. Before that, PFE was a good stock, offering a decent dividend yield and an annual return of more than 10% between 2010 and 2021, which excludes the massive pandemic-related stock price surge.
Now, there are two options:
- PFE is betting on the wrong drugs. Meaning it will continue to underperform. That’s the “dead money” scenario.
- PFE successfully rebuilds its portfolio, causing investors to find value. This is the scenario in which I expect the company to deliver major returns on a long-term basis.
Having said all of this, while the market may disagree with me for the time being, Pfizer’s business is starting to perform well.
For example, in 2023, the company generated $58.5 billion in revenue.
Despite a 41% operational decrease year-over-year, which was unsurprisingly attributed to declining sales of COVID-19 products like COMIRNATY and PAXLOVID, the company still achieved 7% operational growth on a COVID-adjusted basis.
Obviously, adjusting for negative factors doesn’t change the bottom line.
However, it shows what the core business is capable of.
Additionally, according to the company, the finalized acquisition of Seagen is poised to contribute significantly to revenue growth in 2024 and beyond, with approximately $120 million in revenue already factored in after the acquisition’s close.
Digging a bit deeper into the non-COVID portfolio, the company’s portfolio remains strong, supported by products like the newly approved RSV vaccine, VYNDAQEL, and Eliquis, which all contributed to revenue growth.
Interestingly, Pfizer’s success in Eliquis, which lowers stroke risks, was one of the reasons why the German Bayer giant stopped its own Phase III study of OCEANIC-AF.
The decision to end OCEANIC-AF early is in line with the recommendation of an Independent Data Monitoring Committee, which during the ongoing surveillance of the study found that asundexian had “inferior efficacy” versus Bristol Myers Squibb’s and Pfizer’s Eliquis (apixaban). Bayer will take “appropriate measures” to close the study and will work with investigators to determine the next steps for patients. – BioSpace
Additionally, the company’s cost realignment program is expected to deliver at least $4 billion in net savings by the end of 2024, enhancing operational efficiency and margin expansion prospects.
In general, the company remains very committed to both innovation (this one is obvious) and shareholders.
Last year, the pharma giant returned $9.2 billion to shareholders through dividends. It also invested $10.7 billion in internal R&D and spent $44 billion on external growth. The $44 billion includes the Seagan deal, a transaction that could massively change the future of Pfizer.
Before I elaborate on growth, the company’s dividend has become extremely juicy.
$9.2 billion spent on dividends last year translates to 6.1% of its current market cap.
In fact, on December 15, 2023, the company hiked its dividend by 2.4% to $0.42 per share per quarter. This translates to a yield of 6.3%, one of the company’s highest yields ever!
During its earnings call, the company explained its capital allocation strategy, which is based on three pillars.
- Growing its dividend.
- Reinvesting in the business.
- Buying back stock (after reducing debt).
In other words, investors should expect the dividend to remain strong, backed by an improving outlook and a commitment to maintain consistent dividend growth.
On a side note, analysts expect the company to lower net debt to $42.4 billion next year, which indicates a 1.8x net leverage ratio. That’s sustainable and backed by an “A” credit rating.
This brings me to the company’s outlook.
Pfizer’s guidance for 2024 was quite promising, with expected total revenues in the range of $58.5 to $61.5 billion. These numbers exclude COMIRNATY and PAXLOVID.
Furthermore, expected operational revenue growth of 8% to 10% shows the company’s confidence in its product portfolio and pipeline, especially because this would indicate accelerating growth compared to 2023.
Meanwhile, adjusted diluted earnings per share are projected to be in the range of $2.05 to $2.25. The midpoint of these numbers is $2.15, which indicates a dividend payout ratio of 78%.
This payout ratio may be a bit lofty. However, bear in mind:
- The dividend is likely safe.
- The company is in the early stages of accelerating growth(!).
Also, the EPS numbers include a $0.40 headwind related to costs to finance the Seagen deal!
With that in mind, let’s take a closer look at growth opportunities.
There’s A Lot Of Growth Potential!
In 2023, the company secured nine new molecular entity approvals on top of important expanded indications for existing products.
It now has a number of promising developments going in its favor:
- PADCEV: This drug is approved for locally advanced/metastatic bladder cancer. PADCEV’s recent FDA approval widens the company’s reach in the frontline metastatic urothelial cancer setting, doubling the addressable population.
- Vepdegestrant: Phase III data readouts are anticipated for second-line HR-positive metastatic breast cancer, potentially adding another valuable asset to Pfizer’s oncology portfolio.
- Braftovi: Phase III data readouts are expected in first-line BRAF colorectal cancer. This allows the company to service unmet medical needs in oncology.
I highlighted the three drugs above in the overview below.
On top of that, during last month’s Oncology Innovation Day, the company explained that its oncology business had 19% annual growth between 2014 and 2023, beating the industry average by 9 points per year.
It is seeing huge successes in key drugs, especially in collaboration with other biotech/healthcare giants like Merck (MRK), which owns the rights to KEYTRUDA.
According to the company, one example of its success is the groundbreaking data from the EV-302 trial, which evaluated PADCEV in combination with KEYTRUDA as a first-line treatment for metastatic urothelial cancer.
The results of the EV-302 trial showed unprecedented success in patients with advanced urothelial cancer, leading to a huge reduction in the risk of disease progression or death compared to standard chemotherapy. This is also shown in the chart below.
Furthermore, the trial showed a complete response rate of 30%, a number the company rarely sees in urothelial cancer treatment.
The Seagen deal helps the company grow in this area, as it basically doubles the company’s oncology research and resources.
I believe this quote from the 4Q23 earnings call is absolutely key (emphasis added):
Seagen’s in-line medicines are expected to immediately enhance Pfizer’s top line growth, and our combined portfolio provides the opportunity to lead genitourinary cancers and be a leader in breast cancer and deliver at least 8 potential blockbuster products by 2030. – PFE 4Q23 Earnings Call
In fact, the company expects to grow its oncology business from roughly $3.1 billion in 2024E to at least $10 billion by 2030. It also “feels very good” about these expectations, as it gets access to more data.
So, what does this mean for its valuation?
Is PFE “Dirt Cheap?”
I truly believe that PFE is way too cheap. Currently, the stock trades at a blended P/E ratio of 14.0x. That’s not necessarily cheap. However, it is influenced by the steep EPS decline after the pandemic.
Going forward, analysts are very upbeat, expecting the following EPS growth rates :
Year | EPS Growth |
2023E | 21% |
2024E | 23% |
2025E | 4% |
These growth rates can also be found in the chart below.
Using the company’s normalized P/E multiple of 11.9x, the stock has room to run to at least $37 in the years ahead.
This implies roughly 40% stock price upside without incorporating potentially accelerating growth after 2026, as it potentially brings more blockbusters to the market in key areas like oncology.
Bear in mind that I’m saying “potentially,” as the company’s success depends on FDA approvals. While I do not expect major headwinds, it’s still a risk to keep in mind.
All things considered, when adding its 6% yield to expected EPS growth, I believe the stock has a shot at returning more than 15% per year in the years ahead, making it a very attractive deep-value play.
In fact, it may be the cheapest non-commodity stock on my radar.
As a result, I’m considering buying PFE in the months ahead. I just need to figure out how to allocate my cash, as I recently made some large investments (more info on that soon), and because I haven’t figured out what I want my healthcare exposure to look like to “future-proof” my portfolio.
However, PFE has become such a good deal that I have put it near the top of my buy list.
Takeaway
In light of a market that has ignored value stocks for a long time, elevated valuations, and Pfizer’s recent pandemic struggles, I find the company’s deep value very compelling.
With its robust dividend yield, commitment to growth, and promising pipeline, Pfizer presents a strong investment opportunity.
Despite the risks associated with FDA approvals, I believe Pfizer has significant upside potential, potentially returning more than 15% per year in the years ahead.
As such, I’m seriously considering adding Pfizer to my portfolio and prioritizing it as a top buy.
Pros & Cons
Pros:
- Deep-value proposition: Pfizer offers a compelling investment opportunity with its low valuation and high dividend yield.
- Strong commitment to growth: The company’s promising pipeline and strategic acquisitions, like Seagen, position it for future success.
- Attractive dividend: Related to the first bullet point, Pfizer’s high dividend yield provides a reliable source of income for investors.
Cons:
- Regulatory risks: FDA approvals are crucial for Pfizer’s success, and any setbacks in the approval process could negatively impact the stock.
- Market volatility: Like all stocks, Pfizer is subject to market fluctuations, which could affect its share price in the short term.
- Competition in the healthcare sector: Pfizer faces stiff competition from other pharmaceutical companies, which could impact its market share and revenue growth.