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At under $40, is the Pfizer share price too cheap?

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Since it announced that it had developed a Covid vaccine, the Pfizer (NYSE: PFE) share price has risen 18%. And it’s up almost 24% in the past year. Nonetheless, with a recent trading update that was excellent, in the views of many, Pfizer shares are now too cheap. But are they really? Yes, the company has managed to grow both profits and revenues. But these positives need to be balanced against some of the risks, especially as the company is facing multiple patent expirations in the middle of the current decade.

Recent trading update

In the first-quarter trading update, the positive impact of the vaccine could be seen. In fact, Q1 revenues were $14.6bn, 45% higher than the previous year. Profits were 48% higher at over $5bn.

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These are clearly very strong results and demonstrate why Pfizer shares have managed to rise recently. The company also announced a quarterly dividend of 39 cents per share. This equates to an annual yield of roughly 4%. In comparison to the majority of pharma companies, this is high and I feel it offers a compelling reason for me to invest.

The recently strong financial results have equally demonstrated the positive impact of the coronavirus vaccine on the company. Indeed, Pfizer expects to generate $26bn in revenues from the vaccine alone. These revenues seem fairly safe. This is because it has signed a number of long-term contracts with governments around the world, many of which extend until 2024. The problem here is whether Pfizer can maintain its revenue growth after the need for coronavirus vaccinations has diminished.

What does the future hold?

Fortunately, Pfizer is not entirely reliant on the vaccine, and its core business has continued to perform strongly. Indeed, excluding the effect of the vaccine sales, revenue growth was still 8%.

Furthermore, the company has invested large amounts of cash into research and development, which will hopefully come to fruition in the future. In fact, as of March, Pfizer’s pipeline included 99 potential new therapies. Although not all of these will work out, it is still very promising. A new, successful drug would likely have a positive effect on the Pfizer share price.

Even so, there are risks that need to be pointed out. For example, many of Pfizer’s most successful drugs are coming up to patent expiration. These include the immunology drug Xeljanz in 2025 and Prevnar 13 in 2026. This means that generic competition will be able to enter the market. As such, it is vital that the company can continue to expand its pipeline in case sales of these drugs are negatively affected.

Is the Pfizer share price a bargain not to be missed?

This year the firm expects earnings per share of around $3.60. This gives Pfizer shares a price-to-earnings ratio of around 11, which does indicate a cheap valuation. After the success of the vaccine, it is also hoped that the company can build on this and remain a leader in innovation. Hopefully, this would be met with even larger profits in the future. So, I do believe the Pfizer share price is too cheap and has some upside potential. As such, I’m very tempted to add Pfizer shares to my portfolio. 

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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