Pfizer Earnings: Will The Biggest Keep Getting Bigger?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Pfizer (NYSE: PFE) has done well for its shareholders over the past several years, although it is still trading toward the lower end of its 10-year range.  Investors in the world’s largest pharmaceutical company will want to see signs of growth ahead when Pfizer reports earnings next Tuesday. 

 

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Pfizer has what is possibly the most diverse drug portfolio in the sector, with products including Lipitor, Novarsc, Lyrica, Prevnar, Enbrel, Celebrex and the world-famous Viagra, just to name a few.  The company has been active in acquisitions, which has been the biggest driver of growth over the past decade.  The most recent major acquisition was Wyeth, which Pfizer purchased for $68 billion in 2009, significantly exposing their exposure to the vaccines market.

Pfizer spends approximately $8.5 billion annually on research and development of new products.  Currently developing 78 compounds, 25 of which are in late Phase 3 approval or registration.  One of Pfizer’s competitive advantages is that its R&D capabilities are much greater than that of their peers. However, analysts believe Pfizer is capable of more than it has produced in recent years.  An increase in R&D efforts would be welcome news during the earnings call. 

In terms of valuation, Pfizer seems very fairly valued compared to its peers.  Currently, the stock trades at just 12.2 times 2012’s consensus earnings of $2.16 per share. However, the company is projected to have slower-than-average earnings growth for the next few years. 

In comparison, the No. 2 pharmaceutical company by market cap, Novartis (NYSE: NVS), trades for 18 times earnings, albeit with more earnings growth expected.  The same is the case with No. 3, Merck (NYSE: MRK) which trades for 20 times earnings. 

Consensus estimates for Pfizer call for earnings of $2.29 and $2.35 in 2013 and 2014, respectively, an average growth rate of just 4.3% for the next couple years.  The most common reasons cited by analysts for the slow growth include lower gross margins and the sale of the company’s nutrition business to Nestle this past November.  Before buying into Pfizer, I would want to see the growth issue addressed.

However, those who invest now may be handsomely rewarded if Pfizer does figure out the path to earnings growth.  Pfizer’s 5-year historical average P/E is 16.6 times earnings, a considerably higher valuation that the stock is presently trading for.  Using this multiple, that gives us a potential $35.85 price target if things start to work out.  In the meantime, investors are paid nicely to wait, as the company yields a healthy 3.6% dividend.

So, what am I looking for when Pfizer reports on Tuesday?  Well, obviously, I’m looking at the earnings numbers, as anything above $2.16 per share for 2012 should give the stock a nice bump.  More important than the numbers themselves, however, will be the company’s outlook for the next several years.  Any news of the R&D front in terms of drug approvals or increased R&D spending efforts would certainly be very influential. 

Having said all of that, I believe in Pfizer long-term, and any bad news during the earnings call could create a very nice buying opportunity in one of the few pharmaceutical names I like for the long haul.


KWMatt82 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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