The broader market pullback is an opportunity to buy the best stocks at a discount — and one sector I’m targeting to ride the next upswing is healthcare, suggests Sean Brodrick, growth stock expert and editor of Wealth Megatrends.
Even with high inflation, the sector’s quality stocks should succeed because their products and services are essential. Healthcare demand is fairly inelastic. Consumers have little choice but to comply with price hikes.
When raw material and input costs increase, healthcare companies pass them along to consumers. The healthcare industry is consistently growing. It’s expected to average about 5% annual growth between 2022 and 2030. The sector is projected to reach $6.8 trillion by the end of the decade.
Pfizer (PFE) is an American pharmaceutical and biotechnology behemoth headquartered in New York City. It researches, develops and produces medications and vaccines for healthcare patients. Pfizer is the third largest pharmaceutical company by market cap, with a total market value of $277 billion.
The company breaks down revenues into six main segments: vaccines, hospital, oncology, internal medicine, rare
disease and immunology. Vaccines were Pfizer’s biggest cash cow last quarter, generating nearly $15 billion of its $25.7 billion in revenues.
The company boasts a strong drug product line, including Comirnaty (its COVID-19 vaccine) and Paxlovid, which generate billions of dollars in annual revenues.
The company’s sales boomed after the pandemic began due to demand for its COVID-19 vaccine and boosters. In 2021, the company generated $37 billion in revenues from its COVID-19 vaccine. This year, it should bring in $32 billion from sales of Comirnaty. That’s not including the $22 billion it expects to bring in from its Paxlovid virus pill.
Analysts believe Pfizer’s combination of COVID-19 vaccines and antiviral drug sales could peak between $50 billion to $60 billion annually. Since COVID-19 is expected to resurface seasonally with new variants, analysts say Pfizer could generate $25 billion from COVID-19 vaccine sales even in 2027.
The pandemic should continue acting as a significant driver of Pfizer’s revenues, but it isn’t the entire picture. The accompanying chart highlights vaccines’ minimal share of the broader pharmaceutical industry.
Long after the world recovers from the COVID-19 pandemic, Pfizer should continue capitalizing on consistent healthcare sector growth. The company increased its research and development budget 47% year over year to $13.8 billion in 2021.
Along with strong positive tailwinds, Pfizer has an extremely strong financial profile. The company is significantly undervalued compared to its peers. Of the massive pharmaceutical companies with market capitalizations greater than $150 billion, Pfizer has the lowest price-to-earnings (P/E) and price-to-free cash flow (P/FCF) multiples by far.
Pfizer’s forward P/E ratio of 9.3 is about a third lower than the median of its peers, while its P/FCF multiple of 8.86 is 39% lower than the industry median. Pfizer has beaten earnings consensus in each of the past five quarters, and its earnings per share (EPS) has grown an average of 16% per year over the past five years. In Q1, the company beat both EPS and revenue estimates of $1.55 and $25.6 billion by 5%.
Next quarter, Pfizer’s EPS is projected to soar 77% year over year to $1.90 per share, and its quarterly revenues are expected to grow 41% over the same period to $26.8 billion!
Pfizer is committed to rewarding shareholders, whether through dividend distributions or stock repurchases. In Q1, it distributed $4.2 billion back to stockholders. The dividend accounted for $2.2 billion of quarterly shareholder returns. It yields a solid 3.2% at current prices, and PFE’s dividend’s increased in each of the past 13 years and ... it’s predicted to continue raising 4% per year moving forward.
The remaining $2 billion of Pfizer’s Q1 shareholder returns came from its buyback program. The share repurchases were the company’s first since the pandemic began, but in 2018 and 2019, Pfizer bought back $21 billion of shares!
Since the beginning of the year, Pfizer has mostly traded between $48-$54, while consolidating from last year’s run. However, the stock should retest overhead resistance as healthcare stocks resume their uptrend.
A breakout could send it barreling toward $68 per share in the short-term, but it could head much higher from there. Our proprietary Force Index is positive, meaning PFE has the wind at its back. For now, you’ll have the chance to enter at a discount from its recent high.
