Pfizer meets some but not all of Benjamin Graham's requirements for a defensive stock. The Pharmaceutical company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.
Pfizer Trades at Fair Multiples
The “Graham number” is an equation that enables us to quickly determine how a stock is valued in terms of its earnings and assets:
√(22.5 * 6 year average earnings per share (3.12) * 6 year average book value per share (17.541) = $45.38
At today's price of $36.69 per share, Pfizer is now trading -19.1% below price that Graham would recommend paying for the stock.
Some people use the Graham number alone, but it is best to consider it together with the other requirements for defensive stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Impressive Revenues, Consistent Profitability, and a Growing Dividend Imply Value
Pfizer’s average sales revenue over the last 6 years has been $93.4 Billion, so by Graham’s standards the stock has sufficient revenues to make it worthy of investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today.
Ben Graham believed that a margin of safety could be obtained by investing only in companies with consistently positive retained earnings. Retained earnings represent the cumulative net earnings or (deficit) left to equity holders after dividends have been paid out. Pfizer had positive retained earnings from 2008 to 2022 with an average of $74.02 Billion over this period.
Ben Graham would also require a cumulative growth of Earnings Per Share of at least 30% over the last ten years.To determine Pfizer's EPS growth over time, we will average out its EPS for 2007, 2008, and 2009, which were $1.17, $1.20, and $1.23 respectively. This gives us an average of $1.20 for the period of 2007 to 2009. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $1.63, $3.85, and $5.47, for an average of $3.65. Now we see that Pfizer's EPS growth was 204.17% during this period, which satisfies Ben Graham's requirement.
Negative Current Asset to Liabilities Balance and an Average Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Pfizer fails on both counts with a current ratio of 1.2 and a debt to net current asset ratio of -0.7.
Conclusion
Pfizer offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.
| 2018-02-22 | 2019-02-28 | 2020-02-27 | 2021-02-25 | 2022-02-24 | 2023-02-23 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $52,546 | $40,825 | $40,905 | $41,651 | $81,288 | $100,330 |
| Gross Margins | 79.0% | 78.0% | 80.0% | 80.0% | 62.0% | 66.0% |
| Operating Margins | 27% | 16% | 18% | 20% | 35% | 37% |
| Net Margins | 41.0% | 27.0% | 39.0% | 22.0% | 27.0% | 31.0% |
| Net Income (MM) | $21,309 | $11,153 | $16,026 | $9,160 | $21,980 | $31,370 |
| Earnings Per Share | $3.34 | $1.77 | $2.68 | $1.63 | $3.81 | $5.47 |
| EPS Growth | n/a | -47.01% | 51.41% | -39.18% | 133.74% | 43.57% |
| Diluted Shares (MM) | 6,385 | 6,300 | 5,981 | 5,632 | 5,768 | 5,733 |
| Free Cash Flow (MM) | $18,685 | $17,962 | $14,634 | $16,631 | $35,291 | $32,503 |
| Capital Expenditures (MM) | -$2,217 | -$2,136 | -$2,046 | -$2,226 | -$2,711 | -$3,236 |
| Net Current Assets (MM) | -$58,998 | -$45,737 | -$71,344 | -$55,690 | -$44,321 | -$50,029 |
| Long Term Debt (MM) | $33,538 | $32,909 | $35,955 | $37,133 | $36,195 | $32,884 |
| Net Debt / EBITDA | 1.15 | 1.78 | 3.25 | 2.13 | 0.22 | 0.31 |
