The opportunities arising from the COVID-19 pandemic have been a key investment theme in the current year. In particular, vaccine companies have witnessed strong revenue and cash flow upside.
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Moderna (MRNA) has been among the outperformers with the stock surging by nearly 400% in the last 12 months. With an upside of 33%, returns from Pfizer (PFE) stock have been relatively subdued during the same period.
However, I am bullish on PFE stock and believe that meaningful upside is likely in the coming quarters. It’s worth noting that the S&P 500 index currently trades at a cyclically adjusted price-to-earnings ratio of 38.3.
Pfizer stock trades at a forward price-to-earnings ratio of 11.2. Clearly, the stock seems attractively valued. (See Analysts’ Top Stocks on TipRanks)
Vaccine Driven Growth to Sustain
Pfizer recently reported results for Q3 2021. The company reported year-over-year revenue growth of 134% to $24.1 billion. Growth was primarily driven by sale of COVID-19 vaccines.
It seems very likely that the COVID-19 vaccine sales will continue to boost the company’s revenue and cash flow through 2022. There are several reasons for this view.
First and foremost, Pfizer expects revenue of $36 billion from vaccine sales in 2021. For the coming year, the company already has a revenue visibility of $29 billion based on contracts signed through October 2021.
Furthermore, Pfizer has already received approval from the U.S. Food and Drug Administration for authorization of the COVID-19 vaccine in children aged five to 11 years old. This is likely to serve as an incremental source of revenue in the coming quarters.
Additionally, the U.S. FDA has also authorized booster doses for certain populations. It’s very likely that the booster dose will be authorized by governments globally as immunity wanes. With Pfizer having the capacity to produce four billion doses of the vaccine in 2022, the backlog is likely to increase in the coming months.
Therefore, there are multiple factors that can ensure that the COVID-19 vaccine continues to deliver growth for Pfizer.
Strong Pipeline for Long-Term Growth
Even if the growth from COVID-19 vaccine is left aside, Pfizer is positioned for sustained growth. To put things into perspective, Pfizer reported revenue growth of 7% excluding the COVID-19 vaccine sales.
Further, Pfizer has guided for revenue growth at a CAGR of 6% through 2025. It seems very likely that this growth can be achieved.
The first reason is the company’s existing pipeline. Currently, the company has 29 projects in Phase 3 and another 29 in Phase 2. Once these drugs are approved, it will serve as a catalyst for revenue upside.
It’s also worth noting that for the first nine months of 2021, Pfizer spent $7.9 billion in research and development. On a year-over-year basis, R&D expenses have increased by 31%. These investments will ensure that the long-term product pipeline remains robust.
Another reason is inorganic growth. Pfizer is likely to see strong upside in cash flows coming from vaccine sales. This will provide ample financial headroom to pursue acquisition driven growth.
In August 2021, Pfizer announced an agreement to acquire Trillium Therapeutics (TRIL) for $2.3 billion. The acquisition will diversify the company’s oncology pipeline.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, PFE stock comes in as a Hold, with one Buy and seven Holds assigned in the past three months.
The average PFE price target is $47.57 per share, implying 6.1% upside potential from current levels.
Bottom Line
Besides the growth potential, PFE stock also has an annualized dividend of $1.56. This implies an attractive dividend yield of 3.6%. With robust cash flows, dividends are sustainable.
Overall, PFE stock looks attractive from a valuation perspective. The company’s investment in research and development will translate into steady revenue and cash flow growth. With strong quarterly numbers and a bright outlook, the stock seems positioned for a rally.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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