Skip to main content

Pfizer Inc(PFE-N)
NYSE

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

Is Pfizer Stock the Biggest Bargain in the S&P 500?

Motley Fool - Fri Apr 12, 4:50AM CDT

Pfizer(NYSE: PFE) stock is relatively cheap. I can easily back up that claim. The big drugmaker's shares trade at lower forward earnings multiples than the S&P 500 and the S&P 500 healthcare sector. That meets the definition of relatively cheap.

However, I wouldn't go so far as to claim that Pfizer is the cheapest stock in the S&P 500. At least, I wouldn't have until I saw something recently that blew me away and prompted me to wonder if Pfizer just might be the biggest bargain in the widely followed index.

A shockingly low valuation metric

Let me acknowledge right out of the gate that Pfizer is emphatically not the cheapest S&P 500 stock based on trailing 12-month or forward price-to-earnings (P/E) ratios. You can find dozens of stocks with lower multiples.

But the price-to-earnings-to-growth (PEG) ratio is another story. Yahoo! Finance shows Pfizer's PEG ratio as 0.27. The website obtains this data from Morningstar, a respected financial services firm. To put this value into perspective, an attractive PEG ratio is considered to be anything below 1.0. A PEG ratio of 0.27 is shockingly low.

So is Pfizer the biggest bargain in the S&P 500 based on PEG ratio? No, but it appears to be a close contest. EQT's PEG ratio is 0.2, according to Yahoo! Finance.

Keep in mind that you might find different PEG ratios for Pfizer on other websites. One potential reason is financial services firms can use different look-ahead periods in their growth projections. Morningstar's PEG ratios incorporate five-year growth projections. Also, different analysts can arrive at different growth estimates for the same period.

Questioning Pfizer's super-low PEG ratio

I'm sometimes skeptical when I see surprising information. Because of 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 projected annual growth rate. Pfizer's trailing 12-month P/E ratio is a little over 72. To get a PEG ratio of 0.27, the company would have to deliver average annual earnings growth of nearly 267%. I don't think Pfizer will come close to achieving that level of growth over the next five years.

The big drugmaker's adjusted earnings plunged 91% in the fourth quarter of 2023 because of declining COVID-19 product sales. Pfizer's guidance projects adjusted earnings growth of around 17% in full-year 2024. That's good, but way short of 267%.

Pfizer faces a patent cliff over the next few years. Multiple blockbuster drugs will lose patent exclusivity, including Eliquis, Ibrance, Inlyta, Xeljanz, Xtandi, and Vyndaqel. Pfizer expects these losses of exclusivity will result in a negative impact of roughly $17 billion in annual revenue by 2030.

Sure, the company thinks its new product launches will more than offset the impact of the looming patent cliff. It also expects business development deals will contribute an additional $25 billion in annual revenue by 2030. However, Pfizer projects revenue will increase by a compound annual growth rate of 10% between 2025 and 2030. I don't see any way earnings will skyrocket 26.7 times faster than revenue. I doubt Pfizer does, either.

A bargain but not thatbig of a bargain

In my opinion, Pfizer's actual PEG ratio isn't nearly as low as 0.27. I suspect Yahoo! Finance (or perhaps Morningstar) has a glitch with its data feed.

There are two important lessons for investors from my investigation into Pfizer's suspiciously low PEG ratio. First, don't make investing decisions based solely on metrics you see online. Second, understand a company's business well enough that you're able to spot potentially suspect data.

That said, I like Pfizer and view the stock as a solid pick for income and value investors. Pfizer is a bargain. It's just not that big of a bargain.

Should you invest $1,000 in Pfizer right now?

Before you buy stock in Pfizer, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Pfizer wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of April 8, 2024

Keith Speights has positions in Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

More from The Globe

opinion
This Canadian aerospace stock deserves a place on your watch list
Robert Tattersall