As valuations in the stock market and biopharmaceutical sector rise, it is only natural that value-sensitive investors will look even more intensively for bargains. On average, the established leaders of the pharmaceutical industry like that Pfizer (NYSE:PFE) And Eli Lilly, (NYSE: LLY) are not the first place you’ll find an undervalued gemstone.
Still, that doesn’t mean these two are equal when it comes to the profits investors can get for their money. So let’s evaluate both players to determine which one is the better bargain, and why.
Pfizer’s valuation appears to be close to rock bottom
It’s easy to tell a story about Pfizer being in shambles compared to its former glory.
Operating income for the last twelve months is just $1.3 billion, a shocking 94% decline from just three years ago. The most obvious reason for the decline is that revenue from the company’s coronavirus vaccine and antivirals plunged sharply amid deeply disappointing sales of product launches that management was counting on to drive growth, such as its respiratory syncytial virus (RSV) vaccine.
Currently, Pfizer’s enterprise value to sales (EV/R) ratio is 4.1, and Pfizer’s price to book value (P/B) ratio is 1.9. In short, these two measures suggest that investors have a rather pessimistic view of the future value of the company’s assets and stock, in light of the share price and earnings it has today, and the debt it carries. Let’s explore this a bit further to see why that might be the case, and whether it’s likely to be an accurate assessment or not.
On average, Wall Street analysts estimate that Pfizer’s recent instances of unprofitability will be a long-term blip, with the consensus calling for earnings per share (EPS) growth of around 9.6% per year. But they also see this year and the coming years as a doldrums, with relatively weak growth.
Pfizer likely has some operational inefficiencies that can be ironed out; an activist investor group called Starboard Value took a $1 billion stake in Pfizer in early October. Management is already targeting cost savings that could reduce annual expenses by about $4 billion by the end of 2024.
Moreover, this company is far from rudderless. The long-term strategy calls for a combination of new research and development (R&D) and business development activities to dramatically strengthen sales between now and 2030 by focusing on segments such as cancer drugs. Recent acquisitions of major oncology biotech companies such as Seagen and smaller collaborations will serve these goals efficiently, but not immediately.
So with the big plan already unfolding, it’s probably just a matter of time before Pfizer becomes a consistent performer again. In that light, the shares look quite undervalued today.
Eli Lilly shares are priced based on the growth they are on track to achieve
Unlike Pfizer, it’s very easy to build an investment thesis for Eli Lilly based on its growth rather than its favorable valuation. Over the past three years, normalized diluted earnings per share over the trailing twelve months have increased 60% to $12.13. And right now, at least on the surface, it looks like a company that can continue to grow rapidly for years to come.
The main drivers of the growth are the therapies for type 2 diabetes and obesity, called Mounjaro and Zepbound respectively. Weight loss drugs are all the rage right now, and Lilly’s offering became a blockbuster drug overnight, with Zepbound bringing in more than $1.2 billion in sales in the second quarter alone. Until recently, the company couldn’t even produce enough Zepbound to meet U.S. demand, prompting it to make billions in investments in manufacturing capacity.
What’s more, the pipeline is packed with mid- and late-stage development candidates that could be even better – and cardiometabolic drugs aren’t the only segment either.
In terms of valuation metrics, Lilly’s EV/R ratio is 21.8, while its P/B multiple is 60.7, so it’s clearly much more expensive than Pfizer stock. An additional metric to note is the price-to-earnings (P/E) ratio, which is very high at 112.7 compared to the pharmaceutical industry’s average P/E of 28.5; Pfizer’s recent unprofitable quarters make it unsuitable to analyze with this ratio.
There’s reason to believe Eli Lilly could justify its expensive valuation. The average estimate from Wall Street analysts is that earnings per share will grow at about 42% annualized over the long term, although it’s important to recognize that “long term” doesn’t mean “forever.” With such growth predicted, it is logical that investors will want to buy the shares en masse.
What’s the better bargain?
Between these two options, Pfizer is the better buy right now, although it is also the riskier option because it is not currently as hot as Eli Lilly. As a long-established leader in the pharmaceutical industry, the odds are favorable to successfully reverse declining profitability through a combination of price reductions and pipeline program success.
Given that the stock is quite undervalued, and assuming a turnaround actually occurs, the market will eventually realize that the price needs to be higher, and it won’t be a bargain anymore.
Should you invest €1,000 in Pfizer now?
Consider the following before buying shares in Pfizer:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Pfizer wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $826,069!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns October 14, 2024
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Pfizer. The Motley Fool has a disclosure policy.
Which Pharma Stock Is the Better Buy: Pfizer or Eli Lilly? was originally published by The Motley Fool
