Why this pharma giant could be seriously undervalued
New drug approvals should aid the recovery of pharma giant Pfizer following recent share price weakness.
21st August 2019 10:59
by Rodney Hobson from interactive investor
New drug approvals should aid the recovery of pharma giant Pfizer following recent share price weakness.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
The past four weeks has been tough for shareholders in American pharmaceuticals giant Pfizer (NYSE:PFE) but the recent slide in the share price has opened up a buying opportunity.
This solid multinational, with 10 blockbuster drugs each bringing in more than $1 billion in sales, still offers long term security and a decent yield.Â
The shares hit a low of US$14 in 2009 in the wake of the global financial crisis but from then on it looked as if the only way was up. Over the five years to the end of 2018, Pfizer’s share price rose an average 7% a year, well ahead of the wider stock market.
The shares peaked at $46 last November and perhaps after such a good run they were due for a sharp correction. However, the slide back to $34.60 this month has been overdone and there should be some recovery in the price soon.
What spooked investors was news that Pfizer had voluntarily recalled two lots of the migraine headache tablet, Relpax, because of "potential microbiological contamination".
There is a remote possibility that this could compromise the immune system of someone taking the tablets, with possible life-threatening infections.
It is right for investors to be cautious, given the propensity of Americans to sue and for American courts to hand out excessive compensation and fines but Pfizer seems to have acted promptly and off its own bat, saying the batches might not meet its own specifications.
So far there have been no complaints from members of the public and no reports of adverse reactions. The incident could well blow over.
There has been some better recent news on the drugs front. In May the US Food & Drug Administration approved both Vyndaqel and Vyndamax for the treatment of transthyretin amyloid cardiomyopathy, a rare, life-threatening disease where the build up of protein can lead to heart failure. These are the only medicines approved by the FDA to treat this disease.
The following month the FDA approved Zirabev for the treatment of five types of cancer.
It is vital for pharmaceutical companies to be constantly gaining approval for drugs to offset the expiry of patent protection on older drugs.
The financial figures have been heading in the right direction. Sales have grown in seven of the past eight quarters and earnings have improved in the past 10, half the time in double digit percentages.Â
Profits in the first quarter of 2019 advanced 9% from the corresponding period last year despite a more modest rise of 1.9% in revenue.
There was admittedly some slowdown in the second quarter, with earnings growing just 4% and sales slipping back slightly because of the emergence of cheap generic drugs to challenge two Pfizer products that ran out of patent protection. However, margins remain strong.
It is possible that the third quarter will see a further loss of momentum, which could delay the recovery of the share price. Long term investors need to be patient.
The shares are currently below $35, where they offer a yield just over 4%, quite high for an American company, while the price/earnings ratio is an undemanding 16, below the New York Stock Exchange average and the ratings for rival pharmaceuticals.
Analysts expect strong earnings growth over the next three years, possibly in double digits, which is good going for any company in any sector. The shares of this diversified pharmaceutical company, the largest in the world, could be seriously undervalued.
Hobson's choice: I suggested at the end of January that Pfizer was worth considering after a dip in the share price. The further fall does not make the shares a poor investment. On the contrary, I stand by my long term recommendation which is even more compelling after the further slide.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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