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Stock Strategist

Pfizer's Animal Health Unit Is Best in Show

The divestiture of Pfizer's animal health unit could unlock significant value.

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It's not often that the largest player in an industry is put up for sale, but it's currently happening in the animal health industry.  Pfizer (PFE), which has an estimated 17% of the worldwide animal health market, has put its animal health unit up for sale. We believe that a number of the smaller firms would be interested in acquiring Pfizer's unit in order to gain scale, but the industry is already highly concentrated, and antitrust concerns could force Pfizer to spin off the unit. We believe either outcome could unlock value and serve as a catalyst for the stock to converge toward our $27 fair value estimate.

Given Pfizer's significant discount to our fair value and management's intention of divesting its animal health and nutritional businesses, we believe its shares offer a compelling investment. Our discounted cash flow valuation of the firm gives us a $27 fair value, and our sum-of-the-parts analysis confirms our fair value estimate. We believe the firm's nutritionals business, which is largely international pediatric products, is worth $7.0 billion based on valuation multiples of its most similar competitor,  Mead Johnson (MJN). We estimate that the firm's pharmaceuticals business alone is worth nearly $24, which is significantly above the current stock price.

David Krempa does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.