Is Pfizer Stock A Buy Going Into The Q2 Earnings?

  • $0.62 in EPS on top of revenues of $13 billion is predicted for Q2 which would provide nice momentum going into the latter part of 2016.
  • Margins have finally started to rise despite a tough few years.
  • Prevnar sales may be a bit softer this quarter due to the strong dollar.

Pfizer (NYSE:PFE) announces its second quarter earnings on the 2nd of August and the average EPS estimate is $0.62 per share. Revenues are expected to top $13 billion which would be a 9.8% increase on the corresponding quarter in 2015. Pfizer has become a go-to stock for dividend investors in this sector. After cutting its dividend in the great recession of 2008, dividend increases are most certainly back. Furthermore even with the stock's recent run-up (stock has gone up by 8% over the last month), Pfizer is still currently trading with a forward price to earnings ratio of 15.3 which is attractive.

Bears have stated that recent cost-cutting measures and drugs coming off patent protection will hurt the company's trajectory in forthcoming years but I don't see things panning out this way. You just have to look at some of Pfizer's successful launches (Xeljanz & Ibrance) to see that the company's pipeline productivity is improving meaningfully. Suffice to say that I do not see the recent breakdown of the Allergan deal being detrimental to the company's efforts going forward. Here are things to watch out for on the 2nd of August.

2016 (Helped By Hospira Acquisition) Will Be A Growth Year Revenue Wise

Revenue growth is an important metric, so hitting estimates of $13 billion is important from a fundamental standpoint. Why? Because Pfizer has been reporting negative sales growth for some time now. In fact, top line revenues have fallen from $65 billion in 2010 to $48 billion in 2015. This is why 2016 is important. It will be the first year since 2010 when revenue growth will be positive. Last quarter, Pfizer announced almost a 20% hike in its top line to $13.0 billion. Furthermore, because of its impressive first quarter showing, Pfizer increased its turnover guidance for 2016 to a range from $51 to $53 billion. This needs to remain intact if not improve when the company reconfirms guidance after Q2 earnings are released.

Operating Margins Have Begun To Expand

Increasing revenue is one thing but margins is another. Operating and gross margins have been sliding since 2013 but the first quarter of this year changed things up a bit. Q1 operating margins improved by 2.0% coming in at 29.9% compared to 27.9%  in Q1-2016 and Pfizer's net profit margin came in at 25.5% which was a 3% increase over the same quarter of 12 months prior (see chart). These improvements are the reasons why investors start scaling into stocks. Pfizer is projected to report higher margins, earnings and revenue in 2016 compared to 2015. These are 3 solid fundamental metrics. Dividend investors especially will be tuning in to see whether these trends are continuing.


Prevnar Was A Big Success Last Quarter

Astute investors will be aware that practically all of the company's established drugs have lost exclusivity over the past 3 to 5 years, which have affected sales. However, no loss of exclusivity has taken place over the first 6 months and none are predicted throughout the rest of the year. This should keep sales buoyant especially if drugs such as Xalkori & Xeljanz keep on growing meaningfully. Last quarter, the Prevnar family of drugs grew by 16% to $1.5 billion making up close to 12% in total sales. Lyrica grew by 4% to make up $1.2 billion in sales for the quarter. Xeljanz grew by a whopping 100% in Q1 and Viagra although being relatively flat for the quarter has been growing over the last 12 months which is a positive. Why? Well with Viagra now not being patent protected, it is relying solely on its brand for future sales. It is still a big earner for the company bringing in almost $400 million last quarter so investors will be watching to see if growth rates can resume here.

Enbrel & Lipitor Sales Need To Stabilize

This is really the story with Pfizer. Its innovative drugs and some established drugs like Viagra need to really make their mark in forthcoming quarters. The company's two biggest set of drugs that are presently experiencing negative revenue growth are Enbrel and Lipitor. It is vital that these drugs stabilize in the near term to allow Pfizer's undervalued pipeline to blossom. Enbrel dropped to $733 million last quarter and Lipitor dropped 7% to reach $411 million. Enbrel is part of the GIP (Global Innovation Products) and good things are expected of it. It has to return to growth in the next quarter. Lipitor has lost exclusivity so it will be interesting to see how it performs in Q2.

To sum up, Pfizer's second quarter will be not just about top line growth but also about where this growth is taking place. Some drugs are growing very fast whereas Enbrel, for example, had a disappointing first quarter. Margins again will be critical as the stock has had a big run up over the last 30 days and any weakness here will result in some profit taking. Clinical data from the recent ASCO supported my view of the strong pipeline Pfizer currently possesses. All of these initiatives should offset declines in drugs where patent protection no longer exists.

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  • I do not have any business relationship with the companies mentioned in this post.
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