Key Takeaways:
- The 2-Minute Valuation Model values Pfizer stock at $37/share in 2 years.
- This implies that the stock has over 40% upside from its current share price.
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Pfizer’s stock has fallen over 50% in the past 3 years as revenue from its COVID-19 vaccine waned. Investors have also grown worried about the lack of results from the company’s $43 billion purchase of Seagen and rising competition following the patent expiration on key drugs.
Nevertheless, Morningstar still rates Pfizer as a wide-moat company thanks to its patents, economies of scale, and strong distribution network. Pfizer’s patented drugs create strong cash flows, which Pfizer uses to develop new drugs.
As an industry leader, Pfizer’s ability to invest heavily in research and development increases its chances of producing breakthrough drugs. This continuous innovation helps reinforce its competitive advantage and wide moat.
Today, it looks like Pfizer could be undervalued.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings per share, or EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Pfizer Looks Undervalued
Forecast
On Pfizer’s Analyst Estimates tab shown below, you can see analysts expect the company’s revenue to remain flat over the next 3 years, with normalized earnings per share, or EPS, expected to grow at roughly 1% annually:
View Pfizer’s full analyst estimates >>>
Pfizer benefited massively from pandemic-related revenues over the past 5 years, with the company’s revenue reaching as high as 100 billion dollars in 2022.
Over the past 5 years, the company ended up seeing revenue grow at a 4.0% CAGR, while normalized EPS declined at a 0.2% CAGR.
Valuation Multiple
Pfizer currently trades at around $26 per share, which means the stock trades at just over 3 times next year’s expected revenue and around 10 times next year’s expected earnings.
Pfizer has averaged an 11.5x normalized forward P/E multiple in the past 5 years, so at 9.9 times expected earnings today, the stock is trading a little cheaper than its historical average.
We’ll use an 11x forward P/E multiple in our valuation.
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Today, it looks like Pfizer stock could be on sale.
Fair Value
3 years from now, analysts project Pfizer will reach about $3.10 in normalized earnings per share. At an 11x forward P/E multiple, that values the stock at about $34/share.
We can tack on an extra $4 or so for the dividends that Pfizer is expected to pay over the next 2 years, which brings our total fair value estimate for Pfizer to approximately $37/share.
With the stock trading at about $26 today, this implies that Pfizer stock could rise 19.3% per year over the next 2 years, or 42% in total, to reach this fair value:
The market has averaged about 10% annual returns over the long run, so if Pfizer could rise 19% per year, it would exceed the market’s long-term average.
The stock could be interesting for investors looking to invest in a market leader that appears temporarily out of favor.
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Analysts’ Price Target
The consensus analyst price target for Pfizer today is about $32 per share, which means analysts think the stock has over 20% upside today.
The graph below shows the analysts’ consensus price target relative to the current share price (blue line) alongside the stock price (black line). The higher the blue line, the more upside analysts thought Pfizer had.
Analysts haven’t had the best track record setting Pfizer’s price target. For example, they failed to predict the stock’s 50% surge at the end of 2021.
Still, they think the stock has over 20% upside today:
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, looking at analysts’ consensus price targets can be a great way to get a “second opinion” on your own stock valuation.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Pfizer stock is undervalued today, and the stock could go up over 40% in the next 2 years.
Don’t take our word for it—try it out for yourself! Analyze Pfizer or any stock you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
