Investors have faced a conundrum in valuing companies that benefited from the Covid-19 pandemic.
Pfizer's (PFE) partnership with BioNTech (BNTX) in creating a vaccine, plus its antiviral, Paxlovid, materially boosted earnings and its balance sheet over the last two years. The market has already rightfully been discounting waning Covid-related sales, which is embedded in PFE's 7x price-to-earnings ratio.
But with Pfizer stock already down around 15% in 2023, has the market overly discounted PFE and underestimated its pipeline and residual Covid benefit?
A hard look at Pfizer's finances can offer clarity. In 2022, a whopping 40% of Pfizer's revenue was Covid-related -- $40 billion out of its $100 billion in total revenue.
Remarkably, at the end of 2019, Pfizer had net debt of $44 billion. Over the last two years of stunning profitability, Pfizer's balance sheet is now cash neutral.
Two years of Covid-related cash flow have erased all its net debt -- the equivalent of $8/share -- which leaves its current enterprise value (EV) of $245 billion, slightly below its EV of $260 billion at the end of 2019. Although Pfizer can spend this retained capital on biotech acquisitions, the balance sheet improvement and flexibility seem to be under-appreciated by investors.
Undoubtedly, Pfizer will see a rapid decline in its Covid business. However, the trick will be to understand when the decline is fully discounted in the shares.
UBS downgraded PFE this past week, not because they expect the shares to trade much lower but due to the lack of a catalyst for a move higher. Wall Street dislikes when numbers need to come down, which is the case with Pfizer's Covid vaccine and antiviral sales.
UBS's take: "Despite the arguably more positive growth outlook vs. our prior model, we now see PFE in a period of certain revenue/EPS decline, with risk to estimates skewed to the downside vs. when we upgraded PFE in 2021 when PFE was moving into a period of assured high growth, with upside to estimates."
Pfizer hosted an analyst day in December to highlight its robust pipeline of medicines, mainly in five categories: vaccines, migraine, inflammation & immunology, oncology, and obesity. This year, Pfizer expects to grow revenues ex-Covid by 7-9%.
Bank of America believes "launch momentum over the next 18 months has potential to re-engage investors as Pfizer shares have underperformed peers year-to-date." The firm is positive on its vaccine progress in RSV and the potential of its oral GLP-1 obesity drug in early development to compete with Eli Lilly (LLY) and Novo Nordisk (NVO) .
When Pfizer reports fourth-quarter earnings this week, they will likely have earned $6.50 per share for 2022. Analysts' consensus earnings estimates expect a significant decrease to around $4.30 in 2023 and $4.10 in 2024. Wall Street won't likely price PFE much higher than 10-11x earnings per share until there's a clearer growth path.
PFE is firmly in value territory and by some measures back to its pre-pandemic valuation. Investors can comfortably buy the shares in the high $30s to low $40s and collect a healthy dividend of $1.64, currently yielding 3.75% with the stock currently trading around $43.80.
Since the shares could be range-bound throughout 2023, writing covered calls will add to the return. Its strong balance sheet and copious cash flow can result in a shareholder-friendly stock buyback of 10% of outstanding shares.
When Pfizer reports earnings on Tuesday, any additional weakness will likely prove an opportunity to initiate or add to a position.