- Pfizer rounded off FY2022 with an annual all-time revenue record as management steers the company in a post-pandemic world.
- AmerisourceBergen beat on earnings and revenue as management looks to expand internationally with the name change.
- Leidos Holdings reported a top and bottom-line beat and the company will be one of the beneficiaries of the Infrastructure fiscal spending.
- Shopify reported a solid quarter despite the stock selling off after the news.
Pfizer (PFE): The global pharmaceutical company beat on earnings but revenue came in lighter than expected as the COVID-19 vaccine demand has started to wane. Pfizer reported earnings per share of $1.14 (beat WallStreet estimates by $0.10) and revenue of $24.3 billion (missed WallStreet estimates by $100 million). In comparison to our fund estimates, we expected Pfizer to earn $1.15/share on revenue of $24.5 billion and therefore Pfizer’s headline numbers disappointed. Q1 2023 will be the last full quarter that will have COVID-19 vaccine revenue paid by the U.S. government as they declared May 11, 2023, as the end of the pandemic declaration. The company crossed the $100 billion annual revenue mark for the first time in its history posting $100.3 billion in revenue.
Pfizer’s quarterly revenue growth of 2% was primarily driven by the COVID-19 vaccine and pill revenue. There was margin expansion on gross and net margins as management continues to execute well. The company reported gross margins of 60.3% up from 59.2% in the same period a year ago. Despite the company’s R&D spending being up 5% as management looks to bolster its vaccine/drug pipeline in a post-pandemic world, net margins expanded to 20.6% (up from 14.2%). All of the company’s acquisitions were closed in Q4 of 2022 as management produced cost savings from the merger integration. Looking at cash flows, $37.4 billion was spent on R&D and strategic acquisitions while $11 billion was returned to shareholders through dividends and share buybacks.
Since the pandemic is winding down and becoming endemic, FY2023 is a significant pullback for Pfizer back to normal levels. Management expects full FY2023 revenue to be down close to 30% from the record high as the payment for COVID-19 becomes insurance based. The company looks to spend $13 billion on R&D while maintaining its gross margins above 70%. Overall, a mixed quarter for Pfizer, and the stock has not performed well in 2023 (down 14% from the market close on February 3, 2023). We would like to add more to our stock given the defensive characteristics of the stock and how it helps to diversify our holdings.
AmerisourceBergen Corporation (ABC): The drug wholesaler beat on earnings and revenue as they rebrand the company with the aim of expanding internationally. AmerisourceBergen reported earnings per share of $2.71 (beat WallStreet estimates by $0.08) on revenue of $62.9 billion (beat WallStreet estimates by $80 million). In comparison to our fund estimates, the health supplies distributor exceeded our expectations of $2.68/share in earnings on revenue of $62.8 billion. The company reported revenue growth of 5.4% as they started FY2023 strong. The revenue growth would have been higher but the strong U.S. dollar was responsible for shaving off 0.7% of the revenue growth.
The revenue growth was primarily driven by U.S. Healthcare solutions up 6.1% as hospitals continue to open up to non-COVID-19 treatments. The International segment reported a revenue decline of 0.6% due to the strong dollar and the divestiture of the Brazilian specialty business. Management announced that the company is rebranding to Cencora as they aim to expand overseas starting with Europe. Operating margins remained relatively the same which was impressive given the inflationary headwinds. The company’s net income increased by 6% to end the quarter at $476.2 million. AmerisourceBergen generated $634.4 million in free cash flow but it was down from $783.7 million. The cash balance ended the quarter at $1.91 billion down $1.68 billion as the company spent $1.43 billion on PharmaLex Holding GmbH. The acquisition of the German company will help bolster the company’s biopharma services in Europe.
Management raised its FY2023 outlook on EPS from the $11.30-$11.60 range to the $11.50–$11.75 range. It seems like management is anticipating additional cost savings from integrating its PharmaLex Holding acquisition. Management declared a dividend of $0.485/share
Leidos Holdings (LDOS): The defense information technology provider reported a beat on earnings and revenue as the infrastructure bill funding starts to make its way through. Leidos reported earnings per share of $1.83 (beat WallStreet estimates by $0.22) on revenue of $3.7 billion (beat WallStreet estimates by $80 million). The company’s earnings headline numbers came in well ahead of our expectations as we estimated the company would earn $1.71/share on $3.68 billion of revenue. Leidos continues to be a slow and steady revenue grower reporting 6% revenue growth which was primarily driven by its Civil business (up 10%). Over the next few years, Leidos will be a primary beneficiary of the Infrastructure bill which was passed in late 2021.
Leidos’ net income came in at $180 million with a margin of 4.9% down 10 basis points from the same period a year ago. The margin contraction can be attributed to the interest expense increase as interest rates were increased by the Federal Reserve. Operating cash flow came in at $105 million while the company generated $52 million in free cash flow. Management aims to have a high conversion rate of free cash flow in 2023 which will result in increased dividends for shareholders. The company finished the year with over $1 billion in liquidity. Management gave a solid FY2023 as they forecast to generate between $14.7 to $15.1 billion and earnings before interest & taxes of $1.54 billion. The free cash flow expected to be generated in FY2023 is close to $700 million.
The stock sold off over 4.5% after the report came out as investors interpreted the FY2023 outlook to be a bit of a miss. We think the move in the stock is exaggerated because the company is going to benefit from upcoming U.S. government contracts from the Infrastructure bill. However, Leidos' revenue will be affected later on in the year if Congress does not raise the debt ceiling. We like the old-school nature of Leidos it's a steady company that is a reliable portfolio holding. We are buyers of the stock given how it trades at 19x with a good dividend yield of close to 1.5%.
Shopify Inc. (SHOP): The Canadian e-commerce company beat on earnings and revenue as the company continues to expand its footprint. Shopify reported earnings of $0.07/share (beat WallStreet estimates by $0.09) on revenue of $1.73 billion (beat WallStreet estimates by $80 million). The company exceeded our fund estimates of $0.03/share on earns and $1.72 billion in revenue. Shopify reported revenue growth of 25.4% mostly driven by robust growth from Merchant Solutions (up 30%) and subscription was solid with 14% growth. The company’s Gross Merchandise Volume (GMV) was up 13% to $61 billion. The company has a growing capital business that has a loan book of up to $4.71 billion.
Shopify’s gross profit took a hit from 50.2% to 46% as cost headwinds plagued the company. The company had a disappointing operating loss of $188.7 million down from a profit of $14.4 million. Management will have to bring some cost discipline and execute better to better those operating margins. Shopify had a cash burn on free cash flow as they had $(186) million in free cash flow down from generating $484 million in the same period a year ago. The company ended the quarter with $1.65 billion in cash on the balance sheet. Management gave a solid FY2023 outlook as they expect high teen revenue growth and an in-line capital expenditure spend similar to the one in FY2022.
The company reported a solid quarter despite the stock selling off up to 9% after the news. The stock was priced for a perfect quarter given its 49% run-up into the earnings report. We will continue to hold our shares in Shopify and if the sell-off continues we will be looking to add to our position because we like the company’s growth.
Disclosure: Cresco Investments is long Pfizer (PFE), AmerisourceBergen (ABC), Leidos Holdings (LDOS), and Shopify Inc. (SHOP).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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