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Can the momentum continue for Pfizer (NYQ:PFE)?

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Shares in Healthcare group, Pfizer (NYQ:PFE) are trading at $49.45, just 19.8% from their 52-week high. The company is on a strong forward march, with its share price up 29.2% compared to its sector in the last year and 15.7% in the last six months. As momentum is a strong signal of continued outperformance, Pfizer's shares are worth a closer look.

GET MORE DATA-DRIVEN INSIGHTS INTO NYQ:PFE »

Does the Pfizer fundamental investment case stack up?

On a trailing twelve month basis, Pfizer recorded net sales of $92,367m, which compares to $46,084m in the prior trailing twelve months. The compound annual growth rate of Pfizer's sales was 9.00% in the last five years. Operating profits were $28,010m last year, equating to an operating profit margin of 30.3%. The company has generated an average operating profit margin of 22.5% over the last five years.

At the bottom line, Pfizer's net profits were $24,967m last year, equivalent to a net profit margin of 27.0%, which compares to a five year average net profit margin of 31.3%. In that time the company has recorded a compound annual growth in group earnings per share (EPS) of 14.2%. The EPS growth streak is 3 years.

While these numbers paint a good picture of Pfizer's performance - which ultimately impacts its ability to generate returns for its shareholders - income performance is not the end of the story. In assessing Pfizer's effective use of internal assets and external investment in generating profits as well as its ability to convert those profits into cash, we can gain a better understanding of the company's health and long-term outlook.

Pfizer generated a return on assets (ROA) of 14.9% last year, which provides an indication of the efficiency with which the company is generating profits from all of its assets (including debt and other liabilities). High ratios compared to the peer group show that the company does not have to rely too heavily on investment to generate its profits, while low ratios suggest that it is not utilising its assets particularly effectively. Pfizer's ROA compares favourably to the Healthcare market median. Highly efficient companies also make good use of the money invested in the business, signified by a return on invested capital (ROIC) or a cash return on invested capital (CROIC). Last year, Pfizer's CROIC was 26.7%.

Return on capital employed (ROCE), or a company's ability to generate operating profits from its working capital (current assets - current liabilities), is another important profitability metric. Over the last five years, Pfizer's has averaged 8.99% while its long term average is 8.56%. This indicates that the company has a strong track record for making efficient and productive use of working capital - a positive sign for long term growth.

Looking at the balance sheet provides further evidence of the company's health. At the last set of financial results, Pfizer had $31,069m of cash and short-term investments on its balance sheet, equivalent to 17.1% of its total assets. The company had $36,195m of long-term debt and net debt of $7,367m. A quick ratio and a current ratio of 1.19 and 1.40 respectively demonstrate the company's reliance on external sources of funding to meet its immediate capital obligations. While a cash conversion cycle of 81.7 days shows how long it takes the company to convert the cash it invests in the product into cash profits.

These financial health checks can be summarised by using the list developed by financial academic, Joseph Piotroski. Pfizer passes 8 of the nine of the criteria laid out by the Piotroski F-Score, as demonstrated in the table below:

Piotroski's Rules

Pfizer's metrics

Is the company making a profit?
Return on Assets (ROA) > 0%

14.5%

Is the company generating cash?
Cash Flow Return on Assets (CFROA) > 0%

21.1%

Is it making more cash than it is generating in profits?
CFROA > ROA

ROA: 14.5%
CFROA: 21.1%

Is it more profitable than it was last year?
ROA last year > ROA prior year

ROA last year: 14.5%
ROA prior year: 3.96%

Is the long term debt reducing or stable?
Tangible Assets/Equity (TA/E) last year% <= TA/E prior year

TA/E last year: 21.6%
TA/E prior year: 23.1%

Is it increasing its ability to pay short term debts?
Current Ratio (CR) last year > CR prior year

CR last year: 1.40
CR prior year: 1.35

Is it trading without having to raise funds from shareholders?
Equity Funding Last Year <= 0.01 x Mkt Cap

Market Cap: $279,508m

Improving pricing power or lowered costs
Gross Margin (GM) last year% > GM prior year

GM last year: 62.2%
GM prior year: 79.8%

Is it more productive than last year?
Asset Turnover last year > Asset Turnover prior year

Asset Turnover TTM: 0.51%


While Piotroski's F-Score is a good assessment of Pfizer's trajectory, it is also useful to use analyst forecasts to assess whether profits are expected to continue to move in the right direction. Earnings per share are forecast at $6.99 and $5.31 respectively in the next two years, from $4.54 on a trailing twelve month basis. The earnings trajectory of the last few years is presented in the table below.

EPS Growth 2yrs ago

1yr ago

Last year

Forecast1yr

Forecast 2yrs

17.1%

18.3%

181.6%

70.8%

-24.1%

Quality and momentum combine for a promising outlook

Momentum is an interesting factor in investing. Research show that positive trends in price and earnings can persist and behavioural traits (investors are often loathe to sell their winners) reinforce that. Momentum has certainly been a driving force in the outperformance of some sectors especially in the US in the last decade.

But taken in isolation, momentum can be a troublesome factor to focus on. Momentum can inflate company valuations well above their intrinsic value and when sentiment changes the shock felt by companies that are propped up by positive momentum alone can be severe. That is certainly true in times of economic turbulence, when swings in sentiment are especially risky.

But combining positive momentum with inherent quality is an interesting investment strategy which can point investors to some of the best stocks on the strongest uptrends. This combination of factors can be a clue to finding shares that can deliver solid investment profits over many years. In good times, these shares can become expensive to buy. But in volatile markets, there may be chances to buy them at cheaper prices.

What does this mean for potential investors?

Finding good quality stocks with strong momentum behind them is a strategy used by some of the world's most successful investors. But be warned: these factors don't guarantee future returns and we've identified some areas of concern with Pfizer that you can find out about here.

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