Pfizer (NYSE:PFE) is one of the world’s leading pharmaceutical companies, and as you may have heard, it makes one of the most widely distributed coronavirus vaccines. Right now, its stock price is around $47, and it hasn’t beaten the market consistently over the last five years. But all that might change now that it’s in the limelight and selling vaccine doses like wildfire.
Could it be possible for Pfizer to ride its newfound fame into a share price near $100 over the next few years? I’m of the view that it could happen, so let’s map out how it might come to be — with the help of a simple financial model that I’ll explain as we go.
Brace yourself for a few calculations
Before we start to map out the feasibility of Pfizer reaching $100, let’s articulate a few assumptions so that we can make a well-grounded projection.
First, I’ll be assuming that the impressive rate of Pfizer’s earnings growth over the last year will slow down somewhat.
The company’s trailing diluted earnings per share (EPS) expanded by 50.32% in the last 12 months, and it would be very surprising for a business the size of Pfizer to be able to sustain such rapid growth. But, with sales of its coronavirus vaccine estimated to bring in approximately $33.5 billion in new revenue during 2021 — compared with $41.9 billion in total revenue in 2020 — we aren’t in normal times.
Demand for these vaccines is likely to remain high for at least the next few years, especially considering that people will need booster shots to retain their immunity. Plus, the company will keep launching a handful of new medicines each year, driving even more revenue growth. In the second quarter of 2021 alone, Pfizer chalked up three new approvals, and it currently has seven programs in registration, awaiting the final regulatory approval before launch.
Furthermore, since Pfizer spun off its underperforming generic drug-manufacturing subsidiary, Upjohn, in late November 2020 (joining it with Mylan to form a new country called Viatris), it won’t be facing as much pressure on its margins. So, I’ll be assuming that the company’s EPS will continue to grow at 25% year over year — still quite quick, despite being much slower than its recent pace.
Next comes valuation. Pfizer’s trailing price-to-earnings (P/E) ratio is currently about 22. It’s likely that market has all of the relevant information regarding its rate of growth over the past year, as well as all of the information about expected vaccine sales and near-term earnings estimates, so let’s assume that the P/E multiple will remain constant through 2025.
Effectively, that means we are assuming that the market will not dramatically change its appraisal of how much the company is worth compared to its expected earnings. But, investors should note that if Pfizer were a smaller company without a history of successful drug development and commercialization at scale, this assumption would not be safe to make because there would be too much room for surprises with large revenue impacts.
Finally, its current diluted trailing EPS is $2.34, so I’ll be using that as the starting point to model the stock’s growth over the next three years. For that number to remain meaningful, we’ll also posit that Pfizer won’t issue any new shares to raise cash, which it shouldn’t need to do anyway given its $21.7 billion in liquid funds.
If all of these assumptions about vaccine demand, earnings growth rate, and the stock’s valuation hold up, Pfizer could reach $4.57 in diluted trailing EPS by August 2024, making its stock price $100.55 when we multiply the EPS by the P/E ratio. That means the stock is capable of more than doubling before 2025.
You should be aware that my simple model’s estimated price is highly sensitive to the rate of earnings growth. If earnings grew at a rate of “only” 20% annually over the next three years, Pfizer’s stock price might be in the ballpark of $89.
That said, investors should probably expect compensation in the form of larger dividend payments rather than share price appreciation alone. The company’s payout ratio is 70.64%, meaning that most of its quarterly earnings growth is dispensed in dividend form rather than retained or spent on stock buybacks. That might eventually change, but until it does, dividend payouts will likely mitigate most of the upward pressure on the stock’s price.
So, while it’s possible for Pfizer’s stock to reach near $100, it probably won’t happen anytime soon if it keeps paying a dividend. Nonetheless, the future amount of incoming revenue means that there are probably still large shareholder returns ahead. In other words, Pfizer could still be a highly lucrative stock to own, even if its chances of reaching triple-digit prices are largely theoretical for the time being.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.