Over the past six months, Pfizer’s shares (currently trading at $24.29) have posted a disappointing 8.5% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Pfizer, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Pfizer Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why you should be careful with PFE and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand Branded Pharmaceuticals companies by analyzing their organic revenue. This metric gives visibility into Pfizer’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Pfizer’s organic revenue averaged 13.1% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Pfizer might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Pfizer’s margin dropped by 11.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Pfizer’s free cash flow margin for the trailing 12 months was 18%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Pfizer’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Pfizer’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 8.1× forward P/E (or $24.29 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Pfizer
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