Pfizer (NYSE:PFE) Stocks are relatively cheap. I can easily support this claim. The major drugmaker’s shares are trading at lower expected earnings multiples than the S&P 500 and the S&P 500 healthcare sector. That fits the definition of relatively cheap.
However, I wouldn’t go so far as to say that Pfizer is the cheapest stock in the S&P 500. At least I wouldn’t have until I recently saw something that blew me away and made me wonder if Pfizer might be the biggest bargain in the widely followed index.
A shockingly low valuation metric
Let me start by acknowledging that Pfizer is doing this forcefully not the cheapest S&P 500 stock based on the trailing 12-month or future price-to-earnings (P/E) ratio. You can find dozens of stocks with lower valuation metrics.
But the price-to-earnings-growth (PEG) ratio is a different story. Yahoo! Finance shows that Pfizer’s PEG ratio is 0.27. The website sources this data from Morningstar, a reputable financial services company. To put this value in perspective, anything below 1.0 is considered an attractive PEG ratio. A PEG ratio of 0.27 is shockingly low.
So based on the PEG ratio, is Pfizer the biggest bargain in the S&P 500? No, but it seems to be a close competition. EQTAccording to Yahoo! the PEG ratio is 0.2. Finance.
Note that you may find different PEG ratios for Pfizer on other websites. One possible reason for this is that financial services companies may use different forecast periods in their growth forecasts. Morningstar’s PEG ratios take five-year growth forecasts into account. Additionally, different analysts may come up with different growth estimates for the same period.
Pfizer’s extremely low PEG ratio is being questioned
I am sometimes skeptical when I see surprising information. Given my familiarity with Pfizer’s business, I was suspicious of the company’s PEG ratio of 0.27.
PEG ratios are calculated by dividing a stock’s trailing 12-month P/E ratio by its forecast annual growth rate. Pfizer’s trailing 12-month P/E ratio is just over 72. To achieve a PEG ratio of 0.27, the company would need to deliver compound annual earnings growth of nearly 267%. I don’t think Pfizer will reach anywhere near that level of growth in the next five years.
The major drugmaker’s adjusted profit plunged 91% in the fourth quarter of 2023 due to declining COVID-19 product sales. Pfizer’s forecast assumes adjusted earnings growth of around 17% for the full year 2024. That’s good, but Away almost 267%.
Pfizer faces a patent cliff in the next few years. Several blockbuster drugs are losing their patent exclusivity, including Eliquis, Ibrance, Inlyta, Xeljanz, Xtandi and Vyndaqel. Pfizer expects these exclusivity losses to have a negative impact on annual sales of approximately $17 billion by 2030.
To be sure, the company expects its new product introductions to more than offset the impact of the looming patent cliff. It is also expected that business development contracts will contribute an additional $25 billion in annual revenue by 2030. However, Pfizer forecasts that sales will grow at a compound annual growth rate of 10% between 2025 and 2030. I see no way that earnings will skyrocket 26.7 times faster than sales. I doubt Pfizer will do that either.
But not a bargain The large of a bargain
In my opinion, Pfizer’s actual PEG ratio is nowhere near 0.27. I suspect Yahoo! Finance (or perhaps Morningstar) has a bug with its data feed.
There are two important lessons for investors from my examination of Pfizer’s suspiciously low PEG ratio. First, don’t make investment decisions based solely on metrics you see online. Second, you need to understand a company’s business well enough to identify potentially suspicious data.
Still, I like Pfizer and think the stock is a solid choice for income and value investors. Pfizer is a bargain. That’s just not it so big of a bargain.
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Keith Speights holds positions at Pfizer. The Motley Fool has positions in Pfizer and recommends it. The Motley Fool has a disclosure policy.
Is Pfizer Stock the Biggest Bargain in the S&P 500? was originally published by The Motley Fool