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Why Is Pfizer’s Valuation Low Compared to Its Peers?

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A look at Pfizer’s valuation

On August 8, 2016, Pfizer (PFE) was trading at a forward PE multiple of ~13.8x. The industry currently trades at a forward PE multiple of ~17.2x. Its competitors Johnson & Johnson (JNJ), Merck and Co. (MRK), and Eli Lilly and Co. (LLY) have forward PE multiples of 17.9x, 16.9x, and 20.8x, respectively.

The fundamental factors affecting stock prices and valuation include the performance of the growth platforms as well as the exclusivity of blockbuster drugs. Plus, the foreign exchange rates play an important role in the profitability of the company and consequently affect the stock prices and valuation.

This series covers major factors and segment-wise performance of products for improved understanding of each of these drivers.

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Forward PE

From an investor’s point of view, the two best valuation multiples used for valuing companies like Pfizer are forward PE and EV-to-EBITDA multiples, considering the relatively stable and visible nature of their earnings.

PE multiples represent what one share can buy for an equity investor. Based on the last five years’ multiple range, Pfizer’s current valuation is neither high nor low over the past five years, Pfizer’s PE multiple has ranged from ~7x to ~16x.

Forward EV-to-EBITDA

On a capital structure neutral basis, Pfizer currently trades at ~10.3x, which is much lower than the industry’s average of ~13.0x. Its competitors Johnson & Johnson (JNJ), Merck and Co. (MRK), and Eli Lilly and Co. (LLY) have forward EV-to-EBITDA multiples of 12.3x, 12.0x, and 14.5x, respectively.

Analysts’ recommendations

The Pfizer stock has improved by nearly 4.4% in the last 12 months, and the analysts estimate the stock has a potential to return 12.0%. Analysts’ recommendations show a 12-month targeted price of $39.68 per share as compared to the last price of $35.44 per share on August 5, 2016.

Also, 58% of analysts’ recommend a “buy,” while ~42% of analysts recommend a “hold,” according to Bloomberg’s consensus. Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.

Investors can consider ETFs like the iShares Core High Dividend ETF (HDV), which holds 5.6% of its total assets in Pfizer, in order to diversify the risk.

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