Pharmaceutical maker Pfizer (PFE 2.27%) is a longtime staple in the healthcare industry but has become tied to COVID-19 for its role as a vaccine supplier throughout the pandemic. The company's vaccine, developed with BioNTech, has added billions to its top and bottom lines, but investors must prepare for post-pandemic life as vaccine revenue fades over the coming years.
Pfizer's sales could shrink over the short term, but don't let that dissuade you from considering this blue-chip stock for your portfolio. The company's giant cash hoard gives the company several options to create value for shareholders. Here is what you might expect.
Pfizer is financially reborn
Pfizer's been in the pharmaceutical business a long time. With its $265 billion market capitalization, it is an industry behemoth, which doesn't typically happen in this industry without a combination of blockbuster drugs and acquisitions. Pfizer's made dozens of deals over the years, picking up debt along the way; you can see Pfizer's financial state below.
PFE Revenue (TTM) data by YCharts
Quite frankly, Pfizer was a bit of a sloth just before COVID-19. The company had a dwindling cash position and a large debt load. But you can see how vaccine revenue virtually doubled Pfizer's revenue, and those additional dollars have trickled down to the balance sheet. Today, Pfizer has just $7 billion in net debt with a $33 billion cash position. This should help keep Pfizer's options open as it plans for growth over the coming years.
Filling the hole
Long-term growth is arguably the most significant concern facing investors right now. Pfizer estimates that in addition to shrinking vaccine revenue, expiring patents could cost it roughly $17 billion in revenue to competition as generic alternatives flood the market.
Management believes it can drive growth between 2025 and 2030 despite these revenue losses, leaning on returns from recent acquisitions plus gains from Pfizer's internal pipeline. It expects roughly 19 new products or indications (new applications for existing drugs) over the next 18 months, and sales from new products could create up to $20 billion in revenue by 2030.
Image Source: Pfizer.
A long and complex drug approval process means you can't guarantee anything in the pharmaceutical industry, so investors should follow Pfizer's pipeline to see how these come to market and perform once there. But investors should at least be optimistic that Pfizer has a rich lineup of prospects versus a bare cupboard.
The bar is pretty low for solid returns
Pfizer's current price-to-earnings ratio (P/E) of 9 is well below its median P/E of 17 over the past decade, but the vaccine business significantly boosted profits. Fortunately, Pfizer's loss of vaccine revenue doesn't necessarily mean its bottom line will collapse. Analysts believe that earnings per share (EPS) will grow by an average of 12% annually over the next three to five years.
PFE PE Ratio data by YCharts
The company has several levers to pull to make that happen, including share repurchases, which could knock off more than 10% of outstanding shares, though I don't believe Pfizer would spend all of its cash for that purpopse. Ultimately, investors will need to see how the company's performance shakes out due to all the moving parts. Remember that Pfizer's vaccine business won't go away overnight, so it should still see additional cash hit the balance sheet over the next few years.
The good news is that Pfizer doesn't need a ton of growth to generate solid investment returns. Hypothetically, imagine Pfizer's earnings growth is, say, 7% annually. Investors get a dividend that yields 3.4%, so that would create 10% annual investment returns, assuming the stock's valuation didn't change. The picture looks a little sloppy right now, but Pfizer's strong pipeline and cash pile give it a solid chance to create value for investors over time.
