Summary
- Pfizer trades at yearly lows after a 2019 EPS cut and the announced business combination with Mylan.
- The stock spent far too much on stock buybacks in 1H'19 prior to the stock decline.
- The large net debt position has us on the sidelines despite a net payout yield in excess of 11%.
Pfizer (PFE) has recently fallen into the category of biopharma stocks returning tons of capital to shareholders via share repurchases right before the stock collapses. The large net payout yield would normally place the stock into the buy range, but investors should have plenty of questions regarding the stock at this point.
Image Source: Pfizer website
Misunderstood Earnings
The biopharma company recently cut 2019 EPS estimates due to an accounting issue with the forming of a Consumer Healthcare JV and the acquisition of Array BioPharma (ARRY). The end result was Pfizer cutting 2019 EPS estimates by $0.07 due equally to both issues .
Source: Pfizer Q2'19 earnings release
The JV formed with GlaxoSmithKline (GSK) effective August 1 requires Pfizer to record the earnings in arrears, causing a hole in the accounting of the earnings stream. The company isn't losing out on their portion of earnings, but the amount earned in Q4 won't be recorded until next year.
The Array BioPharma deal is a different story with Pfizer spending ~$11.4 billion on the acquisition at a near-term cost to earnings. The company forecast the deal to hit earnings in the following manner:
- 2019 - ($0.04)
- 2020 - ($0.04)
- 2021 - neutral
The deal closed on July 30 and cost Pfizer another $11.4 billion in cash that should limit stock buybacks in the next year. The amount will show up on the balance sheet in the upcoming Q3 earnings report on October 29. The company ended Q2 with a net debt position of nearly $34 billion.
