Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Pfizer (PFE 1.16%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Pfizer's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Pfizer's key statistics:
PFE Total Return Price data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
3.4% |
Fail |
|
Improving profit margin |
89.3% |
Pass |
|
Free cash flow growth > Net income growth |
161.8% vs. 95.7% |
Pass |
|
Improving EPS |
94% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
88.9% vs. 94% |
Pass |
Source: YCharts. *Period begins at end of Q1 2010.
PFE Return on Equity data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
86.1% |
Pass |
|
Declining debt to equity |
(4.4%) |
Pass |
|
Dividend growth > 25% |
33.3% |
Pass |
|
Free cash flow payout ratio < 50% |
43.4% |
Pass |
Source: YCharts. *Period begins at end of Q1 2010.
How we got here and where we're going
Pfizer comes through with flying colors, missing out on a perfect score only because its revenue hasn't held onto its late 2010 highs. However, net income has boomed over the last two years and has been outpaced by free cash flow, a performance that's contributed to two passing grades today. But how might Pfizer increases its revenue in the coming years? Let's dig a little deeper to find out.
Earlier this week, Pfizer announced that tofacitinib (marketed as XELJANZ), a rheumatoid arthritis treatment, has been approved for patients who had an inadequate response to existing therapies in several countries around the world, including Switzerland, Argentina, Kuwait, the UAE, and Russia. Up to a third of RA patients don't adequately respond to available treatments, and about half stop responding to any particular DMARD treatment within five years, according to a Pfizer press release. And with millions of patients at stake, XELJANZ could become a blockbuster, despite having a rather awful name.
Palboclib, a treatment for breast cancer, which Pfizer licenses from Onyx Pharmaceuticals (NASDAQ: ONXX) recently received breakthrough therapy designation status from the Food and Drug Administration this year. On the other hand, Pfizer's new chronic myeloid leukemia drug Bosulif has been rejected by the U.K.'s cost agency National Institute for Health and Clinical Excellence. You win some, you lose some.
Pfizer's most notable recent move was the spinoff of Zoetis (ZTS 1.77%), its former animal-health subsidiary, earlier this year. Zoetis has lost a bit of steam since it hit the market earlier this year, underperforming its former corporate parent since February. However, interest was high enough in a recent exchange of Pfizer shares for Zoetis shares that the program was oversubscribed, and only about a quarter of the nearly 1.7 billion shares tendered were accepted for the transfer. That indicates a bit less excitement in Pfizer's future than its recent share performance might suggest -- roughly a quarter of Pfizer's entire float was tendered for the exchange.
Pfizer's board also authorized a new $10 billion share-repurchase program this past week. This new buyback, plus the remaining $3.9 billion from the existing buyback plan, adds up to nearly 7% of the company's current market cap. Over the past few years, Pfizer has embarked upon four different repurchase programs worth roughly $39 billion, including the latest authorization. Pfizer also plans to retire around $11.4 billion in shares with its Zoetis spinoff. That adds up to a pretty hefty nudge on EPS, but with shares moving toward all-time highs last reached during the dot-com bubble, investors should wonder if all these buybacks are really the best use of Pfizer's hoard.
Putting the pieces together
Today, Pfizer has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
