Pfizer Inc Stock Is Not A Buy Post Q2 Earnings

  • Prevnar sales fell off a cliff in Q2. However new FDA approvals and stronger demand from Europe should increase sales once more.
  • Ibrance and Xeljanz were the stand out winners in the second quarter. Exceptional growth rates are driving sales forward.
  • The 3.39% dividend yield will attract dividend investors if the stock continues to drift lower. This will put a floor under the stock.

Pfizer (NYSE:PFE) stock actually beat earnings estimates in its fiscal second quarter but that didn't keep the stock from falling once earnings were released. The company earned $0.64 cents per share which was $0.02 cents higher than expected but the surprising fall in Prevnar sales (which is Pfizer's biggest product) resulted in investors selling the stock despite the earnings beat. The quarter was essentially saved by the out-performance of the company's cancer-related offering Ibrance and neurology drug Lyrica as strong sales from these drugs offset the surprising weakness in Prevnar.

Top line numbers grew by 11% to reach $13.15 billion in the quarter, which also beat estimates by $140 million. But the question is, can this trend continue? In my opinion, we still haven't seen synergies come out of the Hospira deal last year. This acquisition was designed to shore up the generic side of Pfizer's business but with Hospira only contributing $1.14 billion to this side of the business in Q2, much work is yet to be done here. I mentioned in my preview that a stabilization in Lyrica sales was crucial and we got it. However, I see Pfizer as a hold now and not a buy mainly because I echo investor sentiment in that I don't know where strong growth will come from in the next few quarters.


Prevnar Sales Were Very Poor In Q2

In saying this, the company kept its yearly guidance intact which is another risk the management has now brought to the table. With Prevnar sales dropping to $1.26 billion for the quarter, $320 million below estimates, it is a big risk to keep guidance unchanged in my opinion. Prevnar almost brought in $1.5 billion in sales in Q2 of 2015 and almost reached $1.6 billion in sales in the fourth quarter of last year. It is a crucial vaccine for the company and one of the main reasons why Pfizer presently has an earnings multiple of over 31. In the previous quarter, the vaccine made up $1.5 billion in sales which was almost 12% of the total revenue, but in the latest quarter the Prevnar family of products only made up 9.6% of the total quarter's revenue. Demand obviously dropped in the second quarter for the vaccine but shareholders will be hoping that the recent FDA approval for Prevnar 13 for adults below the age of 50 and more demand from Europe will build demand once more. We should know by the end of the year.

Lyrica Stablized In Q2 And Xeljanz & Ibrance Outperformed Again

On a positive note, Lyrica now being well over a $1 billion earner every quarter, steadied the ship in the second quarter with its $1.05 billion sales number (15% hike over Q2 in 2015). However, it will be the faster-growing drugs such as Ibrance and Xeljanz that will interest the market despite both selling well below Prevnar and Lyrica in dollar amounts currently.

Just look at these growth numbers to get a taste of why the management believes these drugs will hit it out of the park in the next few quarters. Ibrance almost tripled its revenue in Q2 to $514 million and Xeljanz grew its top line to $217 million which was a 70% increase over the second quarter in 2015. These two drugs definitely have the potential to be game changers for the company. Xeljanz is really taking the rheumatoid arthritis sector by storm and Ibrance has the favorable first movers advantage in the CDK4/6 breast cancer area. It would suffice to say that if these growth rates continue, Pfizer stock will go higher.

Pfizer Will Continue To Return Capital To Shareholders

One of the main reasons why I consider Pfizer stock a hold at present is its strong dividend, yielding 3.39%. Second quarter results spiked the pay-out ratio to a 12 month trailing average of 93% which means dividend growth may be softer in the years to come. However, the company isn't expected to raise its dividend until next February and its 3.39% yield will undoubtedly continue to attract yield hunters as the S&P500 average payout currently is 2.3%. The company can boast of a strong balance sheet with a current debt to equity ratio of 0.44. Would I buy here for capital gain? No. But long-term dividend investors should do very well if its pipeline drugs such as Bococizumab and Ertugliflozin deliver on their potential. If Pfizer can meet its 2016 revenue guidance of $51 billion+, then this stock should slowly grind higher and reward shareholders in the process.

To sum up, Pfizer will need to increase its Prevnar sales in forthcoming quarters. The vaccine was already touted as a blockbuster product for the company, but it has fallen short of top line expectation by over $300 million in Q2. Nevertheless, other products such as Ibrance and Xeljanz took the lead this quarter. The stock at the moment is in limbo and until we see a sustained trend in its strongest drugs, investors could just continue to hold and collect dividends along the way.

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