To The Moon

$Pfizer(PFE)$

The market opened strong across most sectors, though there’s some noticeable weakness in the semiconductor space. Still, overall performance remains solid, with impressive gains seen in 2024. Today, our focus is on Pfizer to determine if it's a buying opportunity or a potential trap, as it trades near its 52-week low with a substantial dividend yield of 6.33%.

Starting with Pfizer’s recent earnings report, the company exceeded expectations, both raising its four-year guidance and achieving strong performance metrics. Earnings per share (EPS) came in at $1.06, surpassing the expected $0.62, while revenue reached $17.7 billion against a forecast of $14.95 billion. Additionally, Pfizer increased its EPS guidance from $2.45-$2.65 to $2.75-$2.95, and raised its revenue outlook to $61-$64 billion, up from $59.5-$62.5 billion. Net income for the quarter also showed a positive turnaround, reaching $4.47 billion versus a $2.38 billion loss in the same quarter last year.

However, Pfizer anticipates declines in three out of the next four quarters, with one significant increase expected. Historically, Pfizer has a strong track record of surpassing analyst forecasts, bolstering confidence in management’s projections. Still, a slight drop in EPS is expected over the next four years, which will marginally raise its forward P/E ratio to around 9.2.

When considering Pfizer’s historical performance, the stock is down over the past 12 months by 14% and has lost 133% over the last decade. Its peak price was around $60 in December 2021. Currently trading near its 52-week low, Pfizer’s valuation and yield are attractive, with a forward P/E of 9.12, significantly below industry standards. Wall Street analysts rate it as a buy, though the quant model assigns it a hold with a score of 3.45.

In this quarter, Pfizer's revenue and cost management were solid, with operating efficiencies visible in rising EPS and overall year-to-date performance. Notably, they returned $7.1 billion to shareholders and spent $7.8 billion on research and development. Their strategy also involves reducing debt, with $4.4 billion allocated for this purpose, reflecting a healthy balance sheet. Following its Seagen acquisition, Pfizer’s capital allocation aims to reinvest in growth while returning value to shareholders.

Despite these positives, Pfizer’s balance sheet shows areas for caution. Cash holdings have decreased from $36 billion in 2014 to under $10 billion recently, while debt has grown, highlighting the need to monitor cash flow sustainability. In 2023, Pfizer’s free cash flow payout exceeded its generated cash, though projections show improvement over the next 12 months.

Comparatively, Pfizer under performed other pharma companies over recent years. Yet, its strong dividend yield—currently above 6% and above the five-year average of 4.07%—marks it as undervalued by dividend yield theory, and various valuation models suggest it’s trading at a discount.

Institutional and insider ownership both show stability, with no significant selling and some recent buying by the director, signaling potential confidence in long-term prospects.

Lastly, Pfizer’s valuation metrics reflect an undervalued stock. Key metrics like the non-GAAP P/E of 9.12 indicate a 57% discount compared to the sector. The intrinsic value calculated using multiple models suggests a fair value of around $37, aligning with Wall Street’s $33 target for 12-month upside. This indicates a 25-30% margin of safety, though caution is warranted given Pfizer’s volatility, cash flow concerns, and historical under performance relative to peers.

Overall, Pfizer presents a potential opportunity for income-focused investors due to its attractive yield and valuation. However, it also carries risks due to performance inconsistencies, making it important for investors to weigh potential red flags against yield and valuation before deciding on a buy, hold, or sell strategy.