Pfizer (NYSE:PFE) is undervalued, trading well below its historical and sector averages despite strong non-COVID revenue growth and cost optimizations.

Its expanding pipeline in oncology, obesity treatments, and vaccines positions the company for long-term upside.

With the market underpricing its earnings stability and future catalysts, Pfizer presents a compelling defensive investment with re-rating potential.

Earnings Surge: Strong Growth Beyond COVID

• Warning! GuruFocus has detected 6 Warning Signs with PFE.

Pfizer's Q4 2024 results were higher than anticipated, with resilience in its underlying pharmaceutical business despite the headwind presented by the drop in COVID-19 revenue. The company generated Q4 revenue of $17.8 billion, a 21% operating increase compared to the prior year. Importantly, non-COVID revenue totaled $13.7 billion, up 11% year-over-year, solidifying Pfizer's transition away from pandemic-driven dependency in revenue.

In full-year 2024, revenue was $63.6 billion, an increase of 7% over 2023. Operating revenue growth for non-COVID products was at 12%, above expectations of between 9%11%, supported by robust demand in oncology, vaccines, and internal medicine.

The profitability at Pfizer also grew significantly. Q4 2024 adjusted EPS was $0.63, up from $0.10 in Q4 2023, due to higher-margin drug revenues, cost savings, and synergy gains of the Seagen acquisition. Full-year 2024 adjusted EPS was $3.11, which captures the strength of Pfizer in delivering robust earnings despite pricing pressures as well as portfolio realignment.

Forecasting ahead to 2025, Pfizer reaffirmed its full-year guidance, with revenue of $6164 billion, as well as adjusted EPS of $2.80$3.00. This reflects stability in the face of expected IRA pricing pressures, as well as persisting COVID-19 revenue declines.

The company is relying on a number of key pipeline catalysts for growth, with danuglipron, an oral obesity drug, to provide data readouts in Q1 2025. The drug, if approved, should be a strong revenue generator, though it will be highly competitive with Wegovy by Novo Nordisk as well as Zepbound by Eli Lilly. Other pipeline advancements include atirmociclib, a CDK4 inhibitor for breast cancer entering Phase 3 trials, as well as PCV-25, a next-generation pneumococcal vaccine entering Phase 3 trials in 2025.

The company is also initiating two Phase 3 trials for its PD-L1 ADC candidate for the treatment of head and neck cancer as well as lung cancer. With 13 pivotal study launches as well as nine Phase 3 readouts expected in 2025, the company is well-positioned to power long-term growth.

Key Risks: Can Pfizer Overcome the Headwinds?

Despite the strong earnings of Pfizer and the promising pipeline, the company is confronting emerging threats to its long-term growth trajectory. One of the key threats is the decline in profitability margins due to increasing operating and R&D expenses.

Pfizer's adjusted Selling, Informational & Administrative (SI&A) costs will be between $13.314.3 billion in the year 2025, while R&D costs will be as much as $11.7 billion, creating pressure for the company to grow its margin expansion.

Another significant risk is slower-than-hoped execution in the flagship products in the key pipelines, most importantly in the obesity and oncology areas. While the company is working to position danuglipron as a future obesity franchise, Pfizer lacks the scale of Eli Lilly and Novo Nordisk in manufacturing and GLP-1 supply chains.

Without the capability to demonstrate greater efficacy or patient compliance, danuglipron will be unable to gain meaningful market share. Similarly, emerging oncology prospects atirmociclib and sigvotatug vedotin will need to differentiate themselves from established CDK inhibitors and ADC therapies in order to be able to justify long-term profitability.

Patent cliffs and generic erosion remain risks. While Eliquis and Vyndaqel are fueling top-line growth, the products face future patent expiration and higher pricing pressures. In addition, the pneumococcal vaccine PCV-25 by Pfizer is entering a competitive segment, competing with Merck's established Prevnar franchise, which may limit its uptake.

Financially, its Altman Z-Score of 2 signals distress risk, while its interest cover ratio of 4.83 signals moderate financial pressure, added to by $7.8 billion in upcoming debt repayments in 2024. While the company has good free cash flow, its preference for deleveraging over share buybacks may constrain shareholder returns in the near term.

Although Pfizer remains a solid pharma company, rising costs, competitive pressures, and patent risks could constrain near-term upside unless cost savings are achieved and execution in the pipeline is improved.

Valuation Disconnect: A Bargain Hiding in Plain Sight

Pfizer's valuation remains discounted relative to sector comparables as well as its historical valuation range. Its trailing P/E of 8.6 is a 52% discount to the sector median of 17.9, while its forward P/E of 9.1 is roughly 50% below the sector average of 17.9.

EV/Sales (TTM) multiples also indicate undervaluation. The company's multiple of 3.06 is 13% less than the sector median of 3.51 and 20% less than its five-year average of 3.89. The discount reflects the market assigning a lower valuation multiple in light of the decline in COVID-19-related revenues as well as regulatory headwinds, despite the steady revenue stream of Pfizer as well as its strong core pharma growth.

GuruFocus estimates the fair value of Pfizer at $28.87, while the company is at $26.73, indicating a moderate 7-10% upside through valuation multiples. However, forward free cash flow valuations are much more bullish, with an FCF-based valuation of $52.93, which indicates huge upside if Pfizer succeeds in its margin expansion and pipeline growth. Provided the company beats regulatory risks, expands its franchise, and becomes more efficient, its valuation multiples can rise, prompting a re-rating of the shares.

Pfizers Quiet Strength: A Decade of Payouts, Smart Debt, and Steady Hands at the Helm

Pfizer's capital stewardship and shareholder alignment reinforce its attractiveness as a mature-market defensive holding. The company has returned more than $80 billion to shareholders over the last decade through dividends and share buybacksmore than its 2014 annual revenue.

Despite relatively modest share buybacks in recent years, cumulative capital returns demonstrate a shareholder-oriented mentality seldom maintained over such a long time frame. Insider ownership is low at 0.28%, as is characteristic for large-cap pharma, but Pfizer's institutional ownership is relatively high at 66%, which indicates strong confidence by long-term investors and funds. The largest direct holders include CEO Dr. Albert Bourla and senior executives such as Chris Boshoff and Sally Susman, further highlighting management's vested interest in Pfizer's fortunes.

From the capital structure perspective, Pfizer has added around $20 billion in debt over the last decade, yet this has been balanced by higher revenues and robust free cash flow. Its modest debt-to-equity ratio of 0.72 and manageable debt-to-EBITDA of 3.51 also point towards disciplined use of leverage considering the Seagen acquisition. Pfizer's current cash-to-debt ratio of 0.32 also speaks about disciplined use of leverage considering the Seagen acquisition. All in all, Pfizer has managed to strengthen fundamentals while rewarding shareholdersan ownership story that adds another layer to its long-term investment thesis.

Takeaway

Pfizer presents an appealing risk/reward for investors looking for a defensive, solid stock with undervalued upside. The profits remain strong, with full-year revenue in 2024 rising by 7% and non-COVID revenue rising by 12%. Pipeline advancements in oncology, obesity treatment, and vaccines provide long-term growth opportunities, though execution risks are present. Regulatory pressures and pricing headwinds are threats, though the cost-cutting efforts of Pfizer, combined with the strength of its portfolio, should counteract these threats.

This article first appeared on GuruFocus.