Finding stocks that trade at low valuations is fairly easy as there are many companies with weak prospects trading at low valuations. However, many of those companies are cheap for a reason and lack a catalyst to drive a valuation re-rating.
Pfizer Inc. (PFE, Financial) is a cheap stock based on most conventional metrics. The stock yields 6.10% and trades at just 12.40 times consensus 2024 earnings per share and 10 times consensus 2025 earnings.
The stock has a GF value of approximately $39 per share compared to a current share price of roughly $27. However, I believe the stock lacks any near-term catalyst to drive a closure of this gap.
Recent challenges
The company has struggled over the past three years as sales of the company's Covid-19 vaccine and related products have declined. 2023 sales came in at approximately $58.50 billion, which represents a roughly 42% decline from 2022 levels. Adjusted earnings per share came in at $1.84, representing a roughly 72% decline from 2022 levels. Excluding the impact of the company's Covid-19-related products (Comirnaty and Paxlovid), revenue grew by 8%.
On March 13, Pfizer announced plans to acquire Seagen in an all-cash deal for roughly $43 billion, or $229 per share. Prior to the announcement of the deal, Seagen shared had been trading at $172 per share. In order to finance this deal, Pfizer issued $31 billion in new unsecured notes and used cash and existing short-term financing from its balance sheet. The transaction was completed in December 2023.
Pfizer shares have dropped by roughly 30% since the transaction was first announced. I believe part of the reason for the decline is that shareholders are somewhat skeptical of the large valuation premium paid by the company. Moreover, the financing of the transaction resulted in a significant increase in debt and a more highly levered balance sheet than was previously the case.
Revenue and earnings expected to stabilize
The company expects 2024 revenue to come between $58.50 billion and $61.50 billion. This is in line with current consensus estimates, which call for revenue to come in close to $60 billion. The company expects adjusted earnings of $2.05 to $2.25 per share, which is slightly below current consensus estimates of $2.41. While a stabilization of financial results is a positive, I do not view it as a catalyst to send shares higher given the company's guidance is broadly in line with consensus estimates.
Valuation Perspectives
Pfizer's forward price-earnings ratio of 12.40 is cheap relative to the broader market, which trades closer to 22 times forward earnings. However, the company's valuation is somewhat less compelling compared to peers and its own historical norm.
Over the past 10 years, the stock has traded at an average of 15.70 times adjusted earnings. Some of the company's key peers include Merck (MRK, Financial), Bristol-Myers Squibb (BMY, Financial), Astrazeneca (AZN, Financial) and Novartis (NVS, Financial). These companies trade at approximately 14.90, 7.20, 16.30 and 14.50 times forward earnings respectively.
Based on these metrics, despite a very low price-earnings ratio relative to the broader market, I view Pfizer as only modestly attractive relative to historical norms and peers. Thus, I would only consider buying the stock if an upside catalyst were to materialize.
Potential upside catalysts
One potential upside catalyst for Pfizer would be a potential increase in Covid-19 vaccination rates. Its Covid product, Comirnaty, was the company's best-selling product in the third quarter of 2023, accounting for 37.60% of the total revenue. Just over 505 million doses of its original vaccine were delivered in the U.S. while just 90 million doses of its booster have been delivered in the U.S. A major pickup in cases could result in increased demand for booster shots. However, this seems unlikely given the recent trajectory of interest in Covid-19 vaccines.
Another potential upside catalyst would be successful product launches and sales from the company's oncology pipeline. Pfizer doubled the size of its oncology pipeline when it acquired Seagen. The company believes it can deliver at least eight blockbuster products by 2030. On its third-quarter conference call, the company suggested it believes revenue related to Seagen can reach $10 billion by 2030 from an expected level of $3.10 billion for 2024. This growth is dependent on successful product launches, which can be difficult to predict.
Share repurchases would also represent a positive catalyst. The company currently has a share repurchase authorization of $3.30 billion. However, the company has said it does not anticipate any share repurchases in 2024 as it remains focused on debt reduction.
Conclusion
Pfizer is a cheap stock trading at a valuation well below the broader market. The company has experienced declining revenue and earnings over the past year as Covid-19 product sales have dropped. The company's recent acquisition of Seagen was transformational in nature, but the ultimate success of the deal will depend on pipeline realization.
The stock is currently trading at a modest discount to most peers and at a modest discount to its average historical valuation. However, the stock lacks a near-term catalyst to drive a valuation re-rating.
Increased demand for Covid-19 vaccines, strong product launches from the company's oncology pipeline and a potential resumption of share repurchases are all potential catalysts that investors should keep an eye on. That said, I do not view any of these catalysts as particularly likely to emerge over the short term.
For these reasons, I view Pfizer as a value stock lacking a catalyst and not a highly attractive investment at current levels.
