Should You Take a Chance With Pfizer?

With shares of Pfizer (NYSE:PFE) trading around $31, 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.

Pfizer has renewed its interest in a takeover of UK rival AstraZeneca, in what would be one of the global drugs industry’s largest ever deals. The US group approached AstraZeneca, which has a market value of £51.5bn ($86.6bn), within the last week and could make a public declaration of its interest in a takeover as early as this week, said people familiar with the matter. Going public would be a move designed to put pressure on AstraZeneca’s board to engage in discussions. Pfizer first telegraphed its interest four months ago when it asked the UK group to consider a takeover. The overture was rebuffed, however, and no formal talks took place.

The exact value Pfizer is placing on AstraZeneca could not be ascertained, but people familiar with the matter said a bid would be likely to come in at more than $100bn. This would make it the biggest pharma deal since Pfizer’s $111.8bn takeover of Warner-Lambert in 2000. People close to the situation cautioned that there was no guarantee of a public declaration by Pfizer. The move comes at a time of renewed corporate activity in the sector as drugmakers look to deploy large cash piles and cheap debt to strengthen their positions in an increasingly competitive market. A takeover of AstraZeneca would be easily the biggest foreign acquisition of a British company. UK politicians have raised concern over the implications for jobs and investment since news of Pfizer’s earlier tentative interest emerged last week.

T = Technicals on the Stock Chart Are Strong

Pfizer stock has been trending higher in the last couple of years. The stock is currently trading near highs for the year and looks set to continue this path. 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

20.97%

13%

10%

What does this mean? This means that investors or traders are buying a small 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 small 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

3.26%

12.99%

5.20%

-0.69%

6.19%

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 renewed its interest in a takeover of UK rival AstraZeneca. The stock has been trending higher over the last couple of years and is currently trading near highs for the year. 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. WAIT AND SEE what Pfizer does this quarter.

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