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Comparing Pfizer’s Valuation to Peers after 1Q17 Earnings

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A look at Pfizer’s valuation

Pfizer (PFE) reported a 2% decline in revenues to $12.78 billion in 1Q17, compared to $13.00 billion in 1Q16.

The fundamental factors affecting stock prices and valuation include the performance of existing products, new and existing collaborations, acquisitions and divestments, and other factors including results of clinical trials and product approvals. From an investor’s point of view, the two best valuation multiples used for valuing companies like Pfizer are forward PE and forward EV/EBITDA multiples, considering the relatively stable earnings.

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Forward PE

PE multiples represent what one share can buy for an equity investor. Pfizer was trading at a forward PE multiple of ~12.7x on May 5, 2017, compared to the industry average of ~16.1x. Johnson & Johnson (JNJ), Eli Lilly and Co. (LLY), and Merck and Co. (MRK) have forward PE multiples of 16.9x, 19.6x, and 16.0x, respectively.

Forward EV/EBITDA

On a capital-structure-neutral basis, Pfizer currently trades at ~10.0x, which is much lower than the industry’s average of ~11.6x. Johnson & Johnson (JNJ), Eli Lilly and Co. (LLY), and Merck and Co. (MRK) have forward EV/EBITDA multiples of 11.4x, 14.6x, and 9.7x, respectively.

Analysts’ recommendations

Pfizer stock has risen nearly 0.1% in last 12 months and ~3.0% in 2017 year-to-date. Analysts estimate that the stock has a potential to return ~13.3%. Analysts’ recommendations show a 12-month target price of $37.89 per share, compared to the last price of $33.45 per share on May 4, 2017. Also, there are 22 analysts tracking Pfizer. 50% of analysts’ recommend a “buy” while ~50% recommend a “hold.” Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.

To divest risk, investors can consider ETFs like the VanEck Vectors Pharmaceuticals ETF (PPH), which invests 6.8% of its total assets in Pfizer.

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