Pfizer Inc. (NYSE: PFE) offers a compelling valuation, an attractive dividend yield and good pipeline optionality. This is in part due to its merger with Allergan PLC (NYSE: AGN), which will also effect a tax inversion.
As a result, one key analyst decided to weigh in on this pharmaceutical giant and where it stands to go from here. Merrill Lynch reiterated a Buy rating with a $39 price target, implying an upside of roughly 35% from the current price level.
Merrill Lynch decided to add Pfizer as its new top pick for 2016. The firm views Pfizer as an attractive stand-alone entity, based on a compelling valuation, low pipeline expectations and significant balance sheet strength ($36 billion in cash and equivalents at the end of the fourth quarter).
Based on Merrill Lynch’s conservative assumptions, the Pfizer-Allergan deal adds roughly $4 per share in net present value and is 17% accretive in 2019. The deal is expected to close in the third quarter of this year. The firm sees high potential for Pfizer to vastly exceed these estimates through large-scale buybacks, facilitated by the strong balance sheet and huge cash flow generation of the pro forma entity.
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Pfizer’s current trading range represents a highly attractive entry point, in the firm’s view, given a 37% upside based on stand-alone value, and roughly 51% based on the pro-forma valuation. Furthermore, Merrill Lynch estimates merger-arb-driven short selling is responsible for about $3 to $5 of technical pressure on the stock, which provides some downside protection in the event of a deal break, which is a welcome facet of the thesis, given the current market backdrop.
Merrill Lynch detailed in its report:
Pfizer has declined ~25% since the deal speculation was published in the WSJ on 10/28/ 15, due to a combination of, 1) technical pressure from merger-arb investors, 2) a sector rotation out of healthcare (especially therapeutics) and broader market macro pressures, and 3) short-term orientated investors viewing Pfizer as stagnant given the arb dynamics. However, Pfizer is now at or near its floor value, in our view, with a 2017 EPS multiple of 11.3x (second-lowest in the group and at a discount to the SP500 – 15.4x) and a dividend yield of 4%, which could start to drive support from income investors. While it’s difficult to pinpoint the time at which the spread will begin to narrow, we believe the current upside potential and yield offset any potential gain of delaying.
Shares of Pfizer were trading at $28.80 on Tuesday, with a consensus analyst price target of $39.44 and a 52-week trading range of $28.25 to $36.46.
Allergan shares were trading at $266.67, within a 52-week range of $237.50 to $340.34. The consensus price target is $367.40.
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