Is Pfizer a Good Portfolio Play?

With shares of Pfizer (NYSE:PFE) trading around $30, is PFE an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pfizer is a biopharmaceutical company that discovers, develops, manufactures, and sells medicines for people and animals worldwide. The company manages its operations through five segments: Primary Care, Specialty Care and Oncology, Established Products and Emerging Markets, Animal Health and Consumer Healthcare, and Nutrition. Pfizer’s main products are human and animal biologic and small molecule medicines, as well as vaccines, nutritional products, consumer healthcare products, and products for the prevention and treatment of diseases in livestock and companion animals.

Reuters, Bloomberg, and Forbes report that Pfizer — currently the world’s largest pharmaceutical company — has been contemplating a takeover of AstraZeneca, an asthma and heart drugs maker. According to Bloomberg, the two companies are no longer in talks, but sources speculate that Pfizer is still interested and may follow up with another bid for the company. Sources announced on Sunday morning that Pfizer’s $101 billion takeover offer was rejected by AstraZeneca. Pfizer is supposedly interested in the company for it’s cancer pipeline, which includes a number of a promising yet risky experimental immunotherapy drugs, which boost the body’s immune system in order to fight cancerous tumors.

Pfizer executives also see an AstraZeneca takeover as a way to boost earnings and generate cost savings, according to Reuters, which noted that a deal at a 25 percent premium would boost the company’s earnings almost immediately. “The consensus AstraZeneca model is hugely dependent on pipeline assumptions, as the base business will deteriorate massively by 2020 as several key products go off patent,” said analyst Mark Schoenebaum, who spoke with Bloomberg. The analyst added that Pfizer shareholders might see more risks than benefits in the deal, given AstraZeneca’s largely experimental pipeline and eroding revenue.

T = Technicals on the Stock Chart Are Strong

Pfizer stock has trending higher in the last couple of years. The stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Pfizer is trading between its rising key averages which signal neutral price action in the near-term.

PFE

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Pfizer options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Pfizer Options

21.61%

54%

51%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Pfizer’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Pfizer look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-54.41%

-9.3%

360.5%

58.33%

Revenue Growth (Y-O-Y)

-25.58%

-2.39%

-7.12%

-9.3%

Earnings Reaction

2.56%

1.67%

0.44%

-4.46%

Pfizer has seen mixed earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Pfizer’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Pfizer stock done relative to its peers, Merck (NYSE:MRK), Novartis (NYSE:NVS), Sanofi (NYSE:SNY), and sector?

Pfizer

Merck

Novartis

Sanofi

Sector

Year-to-Date Return

0.78%

14.27%

6.10%

-2.26%

5.72%

Pfizer has been an average performer, year-to-date.

Conclusion

Pfizer discovers and develops medicines for people and animals around the world. The company has been contemplating a takeover of AstraZeneca. The stock has been trending higher over the last couple of years and is currently surging higher. Over the last four quarters, earnings have been mixed while revenues have been decreasing, which has left investors pleased. Relative to its peers and sector, Pfizer has been an average performer year-to-date. Look  for Pfizer to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More From Wall St. Cheat Sheet: