On Tuesday last week, analysts at Citibank downgraded the stock of Pfizer Inc (NYSE: PFE) to “sell”, from the prior “neutral” rating, and slashed its earnings estimates by 5% to 10% for the 2018-2022 period. Analysts also warned that Pfizer must need a big deal to meet the consensus estimates of analysts. Following the downgrade, the stock fell about 5% to $32.40. However, considering the fiscal 2017 first-quarter results reported in the first-week of May, we forecast a rebound in the stock of Pfizer.
An 8% decline in the sales of pneumonia vaccine Prevnar 13 saw Pfizer report a 2% decrease in the fiscal 2017 first quarter revenues to $12.78 billion, from $13.01 billion in the first-quarter of 2016. A 20% dip in the sales of immunosuppressant Enbrel, outside the US and Canada, also contributed to a decline in the total revenues. However, the decline in revenues caused by Prevnar and Enbrel was partially offset by the sales of Ibrance, an advanced breast cancer drug, which recorded a 58% increase to $679 million. The revenues in the recent quarter missed analysts’ estimates of $13.09 billion.
Pfizer completed the sale of Hospira Infusion Systems on February 3rd, 2017. Excluding the revenues of Hospira in the first-quarter of 2016 and 2017, and the negative impact of foreign exchange in the first-quarter, the 1Q17 revenues increased $97 million, compared to 1Q16. Additionally, during the first-quarter, there were one and two less selling days in the US and international markets, respectively. Pfizer stated that it incurred a revenue loss of about $300 million in the recent quarter due to fewer selling days.
Aided by a 13% decrease to $2.47 billion in costs, Pfizer reported a 1Q17 net income of $3.12 billion, or $0.51 per share, up 3% from $3.04 billion, or $0.49 per share, in 1Q16. Excluding deductions, research and development expenses, and amortization of intangible assets, among others, the Q1 2017 non-GAAP net income was $4.19 billion, or $0.69 per share, compared with $4.18 billion, or $0.67 per share, in Q1 2016. The reported non-GAAP earnings were higher than Thomson Reuters’ consensus estimate of $0.67 per share.
The company also reconfirmed its fiscal 2017 revenue guidance of between $52 billion and $54 billion, and non-GAAP earnings of $2.50 to $2.60 per share. The revenues and earnings guidance are flat and up 6.3%, respectively, compared with FY16 results. Analysts are forecasting earnings of $2.55 per share on revenues of $53.15 billion.
During the quarter, Pfizer returned $6.9 billion to shareholders through dividends and share repurchases. Thus, the unexpected jolt in the share price of Pfizer, created due to Citi bank’s downgrade, should be used as an opportunity to buy in the short-term.
As shown in the chart below, the stock of Pfizer has started rising after consolidating at 32.30. Additionally, an oversold scenario is indicated by the stochastic oscillator. Thus, we can expect a short-term rally in the stock.
Investing in a call option offering returns of between 70% and 80% seems to be the best way to trade the probable uptrend. In this regard, we would be scouting for an option expiration date close to May 30th. We would also like to keep the entry or strike price close to $32.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.