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Strong Drug Pipeline Bolsters Undervalued Pfizer

Damien Conover, CFA

Damien Conover: When we look at the large pharmaceutical market right now, one of the companies we really like as being undervalued is Pfizer. Pfizer is, I think, going through a paradigm shift. If you think about the company many years ago, it was facing a lot of patent losses. If you look at the company today, we look at the growth rate improving significantly. The patent losses aren't going to be as significant.

In tandem with this, Pfizer also has a great pipeline that's much stronger than it's been in many years focused on oncology products, immunology products, products that carry very strong pricing power. In the backdrop of this, the bottom-line earnings we anticipate will continue to grow robustly to support a very strong dividend yield over the next several years.

From valuation, we think Pfizer is worth $43.50. We base that on our discounted cash flow model, but we are also very cognizant of traditional multiples that are used in the big pharmaceutical landscape, which is the price to earnings ratio. If we look at Pfizer right now, it's trading at about 12 times next year's earnings, and that's a big discount to the overall group that's closer to 15 times. Nevertheless, Pfizer has a similar growth rate.

We think Pfizer is very well-positioned from a growth standpoint, and we continue to see the company with the strong, wide economic moat, really bolstered by that pipeline that is going after areas of unmet medical need.