As the major U.S. stock indices fell into bear territory in 2022, big pharma stocks quickly became an oasis for nervous investors -- in many cases thanks to their largely recession-proof business models, reliable cash flows, and dependable quarterly dividends.
AbbVie (ABBV 0.46%), Bristol Myers Squibb (BMY 0.22%), Eli Lilly (LLY -1.11%), and Merck (MRK -0.06%) all trounced the broader markets last year:
LLY Total Return Level data by YCharts.
One of the rare exceptions to this trend was Pfizer (PFE 0.35%). Last year, the drugmaker's shares sank by 10.4%, despite the company's stellar earnings growth over the course of the year. Unfortunately, Pfizer's stock hasn't been able to shake off this downward momentum with the change of the calendar year. The pharma titan's shares, in fact, have dropped by another 14.5% during the first four weeks of 2023.
Is it time to catch this falling knife? Let's dig deeper to find out.
Pfizer's valuation, dividend, and development capacity are buy signals
Pfizer's breathtaking nosedive over the prior 13 months isn't all bad news -- at least not for bargain hunters. On the valuation side, the pharma titan's shares are now trading at a highly compressed price-to-earnings (P/E) ratio of 6.7. The industry average for this key valuation metric, by contrast, presently stands at 24.2. What's more, Pfizer's stock hasn't been this cheap, from a P/E standpoint, since 2014.
The drugmaker's declining share price has also resulted in its dividend yield ballooning to a notable 3.75% on an annualized basis. Within the large-cap pharmaceutical space, the average dividend yield currently sits at 3.27%. Pfizer stock thus offers one of the industry's more generous yields.
Thanks to its COVID-19 vaccine Comirnaty and antiviral drug Paxlovid, Pfizer also has plenty of financial firepower for business development (BD). Despite executing multiple recent deals for high-value medications like the migraine drug Nurtec, the sickle cell disease therapy Oxbryta, and the ulcerative colitis candidate etrasimod, Pfizer still had approximately $36 billion in its coffers at the end of the third quarter of 2022.
As a result, the drugmaker can choose to continue its string-of-pearls BD strategy, or it could conceivably pursue a single large acquisition. Pfizer, in short, has options on the BD front to create value for shareholders.
Pfizer's near-term earnings potential is a drag
Pfizer does have some fundamental problems, however. The anticipated decline in COVID-19 product sales this year, and a series of expiring patents for drugs like Eliquis, Ibrance, and Xeljanz between 2025 and 2030, are expected to act as a major drag on earnings in the short term.
Management has noted that Pfizer's diverse pipeline and recent acquisitions ought to offset most, if not all, of these anticipated sales declines by 2030. But this argument is heavily contingent upon the clinical success of assets in hematology and in hard-to-treat indications such as Duchenne's muscular dystrophy. So, as things stand now, Pfizer might have trouble meeting its long-term revenue forecast.
What's the verdict?
All things considered, Wall Street has probably gone overboard on its bearish sentiment toward Pfizer stock. Granted, the drugmaker is dealing with some strong headwinds from COVID-19 sales declines and a bevy of upcoming patent expirations.
But Pfizer's internal research and development engine has been firing on all cylinders lately, and it has the financial capacity to simply buy its way out of a jam if one or more key late-stage assets fail to land in the clinic. Meanwhile, investors can bank on the stock's above-average dividend yield as the company slowly works through these headwinds.
