Pfizer | Fundamental Analysis | LONG SETUP ⚡️

Pharmaceutical giant Pfizer has been at the forefront of the industry, developing drugs to treat COVID since the pandemic began. Unfortunately, the world continues to struggle with different strains of the virus, most recently with the Omicron variant, but Pfizer's products are still in high demand, which will likely boost its results in 2022.

It's been about a year since the first COVID vaccine became available in the U.S., and a race has begun to ramp up production and dose distribution. Several companies have been working on vaccines, but the market has become a two-company market. The vast majority of the doses administered in the U.S. came from Pfizer and Moderna, two companies that developed vaccines using mRNA technology.

Pfizer and Moderna have developed mRNA vaccines that use the genetic code of the virus to trigger an antibody response in the human body.

Traditional vaccines use an attenuated form of the whole virus, which teaches the body to defend itself against it. This is essentially similar to how the body develops immunity after a person gets chickenpox, but the weakened virus does not make the person sick. Both types of vaccines achieve similar results, but pharmaceutical companies can reproduce the genetic code for production faster and easier than the virus itself.

Demand for the vaccine has increased primarily because of the ability of the virus to mutate into new variants. Initially, Pfizer's vaccine was supposed to treat with two doses, but as new variants emerged, many began to give a third shot (called a booster). Pfizer's original 2021 forecast called for 1.3 billion doses, but it ended up producing about 3 billion doses in 2021. Now, the company's management predicts that Pfizer will produce about 4 billion doses in 2022.

This is a tragic and challenging time for society as the pandemic continues, but Pfizer's leadership position has created tremendous benefits for the company. First, the actual sales of its vaccine have been enormous: The company's expected revenue in 2021 was $36 billion. By comparison, Pfizer's 2020 revenue was $41.9 billion; this means that the COVID vaccine nearly doubled Pfizer's business!

What's more, it was profitable for Pfizer. The company's earnings before interest and taxes, called EBIT margin, increased over the past year as the vaccine business grew. The company has also significantly increased free cash flow, which was more than $29 billion in the past twelve months, up from $11.6 billion in 2020. Increased free cash flow makes the business more sustainable, which gives Pfizer more money to invest in research and new product development, pay dividends, or strengthen its balance sheet.

As the Omicron option spreads, it is becoming more likely that COVID will not disappear entirely shortly. Pfizer recently developed an oral antiviral pill to treat early-stage COVID symptoms, and company executives estimate that 80 million courses of treatment could be produced in 2022. Although our focus today is on the next twelve months, Pfizer could potentially profit from the COVID treatment for several years.

Investors have reacted to Pfizer's COVID success; the company's stock is up 56% in the last year, a big gain for a company with a market value of $329 billion. Still, the market may not be valuing Pfizer highly enough.

If we want to value a stock by the amount of free cash flow that investors receive per share, we can look at the free cash flow yield; this percentage reflects how much of the stock price investors receive in free cash flow. We want to get as much free cash flow for our money as we can because it pays dividends, funds new products, and generally creates value for shareholders - it's like the "lifeblood" of a company. Accounting or non-cash items can affect earnings, so free cash flow can provide a fresh perspective on stock valuation.

Pfizer's increase in free cash flow this year resulted in higher returns because free cash flow grew faster than the stock price. Now that the stock has started to rise, yields are down, but we are still near multi-year highs, which means that the stock offers you more "value for your money" than it has for most of the last ten years. In other words, they are still cheap. With COVID firmly entrenched in our world, Pfizer retains its chances of success in 2022.