Pfizer has been treading water for the past six months, recording a small return of 3.6% while holding steady at $25.42. The stock also fell short of the S&P 500’s 18.8% gain during that period.
Is now the time to buy Pfizer, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Pfizer Not Exciting?
We're swiping left on Pfizer for now. Here are three reasons we avoid 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 5.2% 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
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Pfizer’s margin dropped by 17.4 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 19.5%.
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. With its shares underperforming the market lately, the stock trades at 8.8× forward P/E (or $25.42 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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