To The Moon

$Pfizer(PFE)$

Is Pfizer an undervalued stock to buy right now? Let’s answer that question by conducting a discounted cash flow (DCF) valuation of Pfizer stock. I'll break down the inputs and explain precisely where I’m sourcing each number so you can evaluate whether the estimates are reasonable. Let's explore this intriguing healthcare company.

Key Inputs for Pfizer's Valuation

To begin, here are three critical inputs:

• Market Capitalization: $150 billion

• Cash and Equivalents: $1.1 billion

• Total Long-Term Debt: $66.6 billion

Additionally, Pfizer’s total or average number of shares outstanding is 5.7 billion. To project free cash flow (FCF), I’ll leverage Wall Street analysts' estimates for the next several years:

• 2024: $10.86 billion

• 2025: $17.6 billion

• 2026: $16.5 billion

• 2027: $18.02 billion

• 2028: $17.27 billion

While these forecasts are educated guesses, they come from analysts who closely monitor Pfizer and maintain regular communication with its management team.

Understanding Pfizer’s Beta and Economic Resilience

Pfizer’s beta is 0.62, indicating the stock is significantly less risky than the average S&P 500 stock (a beta of 1.0). This lower risk aligns with the nature of healthcare stocks, which are generally less correlated to macroeconomic conditions. Whether the economy booms or enters a recession, healthcare demand remains relatively stable—people seek treatment regardless of their financial situation.

In contrast, industries like automotive are highly tied to economic performance. A strong economy supports car sales, while recessions suppress them. Diversifying your portfolio with healthcare stocks like Pfizer can provide stability, especially when other investments are more sensitive to economic fluctuations.

DCF Model and Assumptions

Forecasting Free Cash Flows: Incorporated Wall Street analyst estimates for 2024-2028, with projected growth of ~29%. From 2029-2034, growth is estimated to halve, then slow to 5% in the long term.

Time Value of Money:Next, to estimate Pfizer's value today, I apply the time value of money concept. Discounted future cash flows to present value using the discount rate. For example, $18 billion in 2027 is worth $14.3 billion today.

Using the Wall Street estimates for FCF through 2028, I forecast slower growth between 2029 and 2034, at half the earlier rate (~14.5%), and a steady long-term growth rate of 5% from 2035 onward.

This discount rate incorporates Pfizer’s weighted average cost of capital (WACC) of 7.93%, with a debt cost of 7.5%. Considering Pfizer's capital structure (40% debt, 60% equity), this approach gives a present value of future cash flows totaling $85 billion.

Adding cash ($1.1 billion) and subtracting long-term debt ($66.6 billion), Pfizer’s equity value totals $74 billion. Dividing this by the 5.7 billion shares outstanding yields an intrinsic value of $129 per share.

Comparing Market Price and Scenarios

Pfizer’s current market price is $26.53, presenting a significant undervaluation compared to my intrinsic value estimate. To ensure robustness, I tested alternative scenarios with higher betas:

• Beta of 0.75: Intrinsic value = $109 per share

• Beta of 1.0: Intrinsic value = $82 per share

• Beta of 1.25: Intrinsic value = $64 per share

Dividend Consistency and Growth

Consecutive Payments: Pfizer has paid dividends for 345 consecutive quarters, reflecting its commitment to returning value to shareholders. Recent Increase: The quarterly dividend was raised to $0.43 per share for Q1 2025, up from $0.42 in Q4 2024, marking the 16th consecutive year of dividend increases. Historical Growth: Since 2014, Pfizer's annual dividend has grown from $1.04 to $1.68 per share, indicating a compound annual growth rate of approximately 5%.

Dividend Yield: As of January 2, 2025, Pfizer's dividend yield stands at approximately 6.31%, offering a substantial income stream relative to its stock price. Payout Ratio Concerns: Notably, Pfizer's payout ratio has reached 222.18%, suggesting that the company is distributing more in dividends than its current earnings.

While Pfizer's consistent dividend payments and attractive yield are appealing, the elevated payout ratio may raise questions about the sustainability of future dividends. Investors should monitor Pfizer's financial performance and earnings growth to assess the ongoing viability of its dividend strategy.

Debt & Risk

Pfizer’s debt levels are manageable in the short term due to its robust free cash flow generation and interest coverage. Declining revenues or persistent high-interest rates could strain its ability to service debt. Pfizer's long-term debt will only become a problem if revenue declines persist without effective cost management or if new growth drivers fail to materialize.

High dividend payouts may reduce financial flexibility if earnings recovery is delayed.

Conclusion

Even under scenarios with higher risk (increased beta), the analysis consistently suggests that Pfizer stock is undervalued at its current market price of $26.53/share. The intrinsic value, even in conservative scenarios, remains significantly higher than the current market price.

I think Pfizer as a potentially attractive investment opportunity, with lower price and Dividen. However, investors should conduct your own due diligence and consider other factors before making a decision.

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