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Earnings Preview: Pfizer Reports Q3 Results Tomorrow Morning

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October 30, 2017
Pills coming off of a manufacturing assembly line
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Earnings season continues with healthcare giant Pfizer (PFE) reporting earnings before the market opens on Tuesday, Oct. 31. Just a few weeks ago, PFE announced it was reviewing strategic alternatives for its consumer healthcare business that potentially include a full or partial separation of the unit through a spin-off, sale or other transaction.

That division’s products include Centrum, Advil, and Chapstick lip balm, among others, and accounted for $3.4 billion in revenue in 2016 according to the company. Analysts estimate a potential deal could be worth anywhere from $11.8 billion to more than $15 billion based on sales multiples from comparable transactions.

PFE CEO Ian Read indicated the move would allow the company to focus on its core pharmaceutical business, which has generated higher margins and growth than its over-the-counter products in recent quarters, and that there is “potential for its value to be more fully realized outside the company.” PFE has made similar moves in the past, spinning off its animal health business, Zoetis (ZTS), through an initial public offering in 2013.

Amid slowing and declining sales across several segments due to competition and loss of exclusivity, PFE has refocused on its core pharmaceuticals, specifically several therapeutic areas that it has said it sees as the greatest opportunities: inflammation and immunology, internal medicine, oncology, rare disease and vaccines. In the second quarter, some of PFE’s newer blockbuster drugs that fall into those categories posted substantial year-over-year growth; Ibrance grew 66% to $853 million, Eliquis increased 50% to $605 million, Xeljanz grew 55% to $336 million. That growth wasn’t enough to keep revenue from declining 2% year-over-year to $12.9 billion in the second quarter.

Beyond its own research and development efforts, PFE has continued to announce collaborations and make acquisitions to expand its drug portfolio and pipeline—PFE announced it had 12 programs awaiting regulatory review and another 32 in late-stage clinical trials at the beginning of August. Recent acquisitions include Anacor Pharmaceuticals for $5.2 billion in mid-2016, which added fungal and skin treatments to its lineup, and Medivation for $14 billion in September of 2016, which expanded its oncology portfolio.

On last quarter’s earnings call, management had said they’re waiting for further clarity around tax reform, or lack thereof, to gain a better understanding of asset values before pursuing any additional major deals. Management also indicated that, in light of any tax reform, it will assess any potential transactions in relation to internal investment, share buybacks and dividends to determine which mix of actions they think would provide the best return for shareholders.

In the first half of 2017, PFE returned $8.9 billion to shareholders through dividends and share buybacks, and the stock currently sports a dividend yield of about 3.5%. At the start of August, PFE’s remaining share repurchase authorization was approximately $6.4 billion.

Pfizer stock ytd performance compared to S&P 500 and S&P Health Care Select Sector Index

FIGURE 1: PFIZER YTD PERFORMANCE.

So far this year, Pfizer (PFE) shares have lagged the S&P Health Care Select Sector Index (IXV) and the S&P 500 (SPX). PFE, charted above, is up 7.88% year-to-date, compared to the IXV’s 17.46% return (purple line) and a 14.32% increase in the SPX (teal line). Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Pfizer Earnings and Trading Activity

For the third quarter, PFE is expected to report adjusted earnings of $0.65 per share, up from $0.61 in the prior-year quarter, on revenue of $13.15 billion, slightly above last year’s $13.05 billion, according to third-party consensus analyst estimates. PFE beat earnings expectations by two cents in each of the last two quarters, but revenue came in $132 million short of estimates in the second quarter and $264 million in the quarter before that. 

Up until mid to late-August, the stock hadn’t really done too much and was pretty much flat on the year. Since then, shares have moved higher and hit a new 52-week high of $36.78 on Oct. 23. They’ve pulled back a little bit ahead of earnings and are up 7.88% year-to-date, closing at $35.60 on Friday. 

Options traders have priced in about a 2% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the November 3 expiration, calls have been active at the 36 and 37 strike prices, while puts have been active at the 35 and 35.5 strikes. As of this morning, the implied volatility sits at the 38th percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

After last week’s full schedule, earnings season is starting to die down a little, although there’s still quite a few big names left to report. Tesla (TSLA) and Facebook (FB) report after market close on Wednesday, Nov. 1, and on Thursday Alibaba (BABA) and Apple (AAPL) will release their quarterly results. If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

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