Author: Juxtaposed Ideas

PFE Remains An Income Investment Thesis – Though Mediocre At Best

PFE 10Y Stock Returns (Adjusted For Dividends)

This is why Pfizer (NYSE:PFE) may have been termed by others as dead money walking. The stock has only generated a 10Y return of +77.17% at the time of writing, compared to its pharmaceutical peers, such as AbbVie (NYSE:ABBV) at +284.22%, Merck (NYSE: MRK) at +210.24%, and Johnson & Johnson (NYSE:JNJ) at +117.90%.

Then again, the former has outperformed the wider pharmaceutical market, compared to Invesco Dynamic Pharmaceuticals ETF (PJP) at +61.31% and SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH) at +8.07% for the past ten years.

PFE 5Y Stock Returns (Adjusted For Dividends)

PFE 1Y Stock Returns (Adjusted For Dividends)

PFE YTD Stock Returns (Adjusted For Dividends)

While past performance may not be an indication of forward results, the PFE stock’s returns have been underwhelming, in our view, even if we are to cherry-pick between the past five years, one year, or even YTD.

Naturally, the same cannot be said for those who have cashed out PFE at the December 2021 top for an 8Y return of ~125%, or even at the December 2022 top for a 9Y return of ~100%. Now, why has the market turned bearish on the stock?

This is mostly attributed to PFE facing three major headwinds, in our opinion.

Firstly, the pharmaceutical company’s success in the COVID-19 pandemic has unfortunately become a double-edged sword. It previously enjoyed immense pandemic-related sales of $36.1B in FY2021 and $56.7B in FY2022 (+57% YoY).

Nonetheless, this cadence has obviously stalled by FQ1’23, with Comirnaty and Paxlovid only contributing revenues of $7.1B (-46% QoQ/-51.7% YoY). Combined with its FY2023 guidance of $21.5B for COVID-19-related revenues (-62% YoY), it is unsurprising that there has been massive pessimism embedded in PFE’s stock prices.

Secondly, the windfall has naturally triggered a massive improvement in PFE’s profitability, approximately at gross profits of $1.21B in FQ1’23 (-75.5% YoY), $13.77B in FY2022 (-14% YoY), and $16.03B in FY2021, based on its gross profit split with BioNTech (NASDAQ:BNTX). This number does not include any profit contribution from the former’s Paxlovid as well, an unspecified sum thus far.

As a result, it is undeniable that PFE’s balance sheet has improved tremendously as a direct result of its COVID-19 pipeline, from $12.24B in FQ4’20, to a peak of $31.07B in FQ4’21 (+153.8% YoY) and moderating to the current $19.97B in FQ1’23 (-16.4% YoY).

However, here is where things are taking a rather pessimistic turn. Instead of further deleveraging its elevated long-term debts of $31.97B in FQ1’23 (-3.7% QoQ/ -10.6% YoY), the pharmaceutical company has been going on aggressive acquisition/ investment sprees thus far, as discussed in my previous article here, while adding Seagen (NASDAQ:SGEN) as its latest conquest.

Most importantly, SGEN will come with a hefty price tag of $43B, forcing PFE to raise $31B of debt to finance the all-cash deal. With the funding expected to come with an eye-watering yield to maturity of 4.75%, against the historical 1.75% in 2021, 2.11% to 2.67% in 2020, and 3.57% in 2019, we may see the latter’s profitability impacted indeed.

For now, PFE pays an annualized interest expense of $1.27B (+1.5% QoQ/ -1.2% YoY), with the sum likely to double once the deal closes, bringing its total sum to approximately $2.7B, if not more. While the pharmaceutical company still boasts an annualized EBITDA of $32.08B by FQ1’23 (+11.3% QoQ/ -30.4% YoY), we believe the sum may normalize nearer to $24B, due to the decelerating demand for COVID-19 products thus far.

In addition, SGEN only reported combined sales of $2.05B (+23.4% YoY) over the last twelve months from its four approved cancer therapies, valuing the deal at a pricey Price/ Sales of 20.9x, compared to PFE’s current valuation of 3.12x. The company is not profitable too, with PFE only projecting approximately $10B of sales contribution by 2030, implying the deal’s overvaluation.

Thirdly, PFE is facing a massive patent cliff between FY2025 and FY2030, potentially impacting its annual top line by $22B, as discussed in my previous article here. This alone explained why the management has been overly aggressive in its M&A activities in order to beef up its pipeline, bankrolled by the COVID-19 windfall.

While we understand the urgency, it remains to be seen if SGEN’s offerings are worth the hefty price tag at a time of elevated interest and peak recessionary environment. Furthermore, many of these pipelines are still in clinical trial stages with the US FDA approval remaining uncertain, implying the highly speculative nature of these M&A activities.

On the other hand, assuming a successful outcome, PFE would have made good use of the recent windfall, suggesting the overly sold stock prices. As a result, we are of the opinion that it currently looks quite attractive at these depressed levels, with the current portfolio still growing by +5% YoY (excluding Comirnaty and Paxlovid).

PFE 10Y Stock Prices

Therefore, we are cautiously rating the PFE stock as a Buy here, assuming that the exercise consequently reduces long-term investors’ dollar cost averages. Then again, we must also highlight that the stock has historically underperformed as a growth stock, only saved by its forward dividend yield of 4.34% against the 4Y average of 3.68% and sector median of 1.33%.

Even then, based on the stock’s mediocre performance thus far, we suppose there are better income stocks out there worth considering, since the payouts may not be sufficient to cover the losses in stock prices. Investors adding PFE here must calibrate their expectations accordingly, in our view.

The Bottom-Fishing Investment Thesis Is Here

DIS 7Y Stock Prices

The Walt Disney Company (NYSE:DIS) has already dramatically reversed most of its recent gains to breach its March 2023 support levels, nearing its 7Y lows at the time of writing. The pessimism embedded in its stock prices is surprising as well, since the company only missed the consensus EPS estimate by the barest -$0.01.

Its FQ2’23 numbers still look more than decent, in our opinion, with revenues of $21.82B (-7.1% QoQ/ +13.3% YoY) and non-GAAP EPS of $0.93 (-6% QoQ/ -13.88% YoY). Well, the headwinds in its profitability are naturally attributed to a few different factors, despite the moderation in its operating expenses to $4.84B (-3.9% QoQ/ -3.7% YoY).

DIS’ long-term debts of $48.51B as of the last quarter (inline QoQ/ -11% YoY), come at a relatively elevated interest rate of 4.08% (+1.06 points YoY), as last reported in the FY2022 annual report. This is on top of the pay-floating interest rate and cross-currency swaps, converting part of its debts to variable-rate indexed to LIBOR. Thanks to the Fed’s hike thus far, its annualized interest expenses have also risen dramatically to $2.01B (+8.3% QoQ/ +34.7% YoY).

Combined with the impact of its restructuring thus far, triggering a one-time expense of $152M in FQ2’23, it is unsurprising that the company’s EPS profitability has been impacted, despite the excellent EBITDA of $3.66B (+8.2% QoQ/ +27% YoY) at the same time.

Therefore, if we are to look deeper, it is apparent that DIS has executed well thus far, especially aided by the narrowing losses in the Direct-to-Consumer segment by the latest quarter.

The D2C reported an operating margin of -11.2% (+8.6 points QoQ/ +6.8 YoY) in FQ2’23, significantly aided by the subscription price hike. Demand appears to be robust as well, with the segment’s top line expanding to $5.51B (+3.9% QoQ/ +12.4% YoY), despite the notable churn in its subscribers to 157.8M (-2.4% QoQ/ -2.4% YoY).

In addition, DIS’ Parks, Experiences, and Products continue to outperform, with revenues of $7.77B (-10.9% QoQ/ +16.8% YoY) and operating margins of 27.8% in the latest quarter (-7.1 points QoQ/ +1.5 YoY), with the seasonal drop commonly occurring in Q1s.

This cadence is directly attributed to the increased demand for domestic parks/ experiences (-8.2% QoQ/ +13.9% YoY) and international parks/ experiences (+8.2% YoY/ +106.2% YoY), as with the Disney Cruise Lines. As a result, it is unsurprising that its FQ2’23 performance has outperformed pre-pandemic levels, compared to FQ2’19 revenues of $6.16B (-9.6% QoQ/ +4.4% YoY) and operating margins of 24.4% (-7.1 points QoQ/ +2.3 YoY).

This is on top of the expansion in DIS’ cash provided by continuing operations at $3.23B (+432.2% QoQ/ +83.5% YoY), with the restructuring also triggering the cancellation of over $1B in capital expenditures for the Lake Nona campus and aggressive cost optimizations by $5.5B.

As a result, we believe Iger has executed brilliantly over the past two quarters, with the temporary headwinds only attributed to the elevated interest rate environment.

Hence, we believe the pessimism embedded in DIS stock prices provides investors with the speculative chance to add. This is because the company’s offerings prove to be resilient in the face of tightened discretionary spending, with profitability likely to improve once the restructuring takes effect and the peak recessionary fears ease, likely by 2025, if not 2024.

DIS & SPY Bottoming In 2009

Combined with the decelerating April CPI and increased likelihood of a peaking Fed raise, we suppose the recovery of the stock market may be sooner than expected, since it normally precedes the actual economic recovery. The same cadence has been observed in the previous recession, with the stock market (DIS and SPY) bottoming by February 2009, with DIS already recovering financially by early 2010.

So, Is DIS Stock A Buy, Sell, or Hold?

DIS 1Y Stock Price

Well, the answer to the question may not be as straightforward, unfortunately. While past performance may be not indicative of its future results, DIS has underperformed in the wider market for the past five years at -15.21%, compared to SPY at +51.75%. The same has been observed for the past year at -12.90%/ +3.94% and YTD at -0.76%/ +8.44%, respectively.

The stock is not a viable income stock as well, with the semi-annual dividend payouts suspended since early FY2020. While we may see a reinstatement by the end of FY2023, market analysts only expect a payout of $0.01 for the fiscal year, with a jump to $0.83 likely in FY2024.

Furthermore, we want to highlight that DIS continues to generate negative Free Cash Flow [FCF] in FQ2’23 at -$168M (+92.2% QoQ/ +66.6% YoY), with $3.45B of its debts due within the next twelve months. While refinancing remains a possibility, the elevated interest rate environment may trigger an even higher cost of lending, potentially impacting its interest expense and cash flow generation in the intermediate term.

DIS NTM EV/EBITDA and Market Cap/FCF Valuations

As a result of the pessimism thus far, DIS’ valuations are also compressed to NTM EV/ EBITDA of 12.42x and Market Cap/ FCF Valuations of 26.90x, compared to its 1Y mean of 14.52x and 40.90x, respectively. The moderation is also notable compared to its 3Y pre-pandemic means of 17.09x and 30.78x, respectively.

Then again, with DIS already roundtripping for the past seven years and returning to its current depressed levels, we are cautiously rating the stock as a speculative buy here. Naturally, this comes with a caveat that the rating is only suitable for long-term investors seeking to dollar cost average, since the stock may remain volatile in the near term, with the company still facing political headwinds in Florida.

In addition, investors must be aware of the potential risks of adding here, since the pessimism may very well put further downward pressure on the stock, retesting its October 2014 and December 2022 bottom of $86. Assuming those levels are breached, we may see another downward slide to the $70s, implying a downside of up to -15% from current levels.

The UPST Investment Thesis Just Got A Lot More Interesting

Upstart Holdings (NASDAQ:UPST) appears to have bottomed by FQ1’23, significantly aided by the recent banking meltdown in March 2023, with the April CPI similarly indicating a decelerating inflation trend ahead.

The fintech has also executed well during the elevated interest rate environment by tightening its loan originations to $997M by the latest quarter (-35.3% QoQ/ -78% YoY), effectively reducing its conversion rate to 8% at the same time (-3 points QoQ/ -13 YoY).

Thanks to the Fed’s continuous rate hike thus far, UPST reported a drastic increase in its interest income to $38.18M in FQ1’23 as well (+9.7% QoQ/ +169.2% YoY), prior to any fair value adjustments of -$52.39M (-49.3% QoQ/ +190.7% YoY).

In addition, the fintech moderated its total operating expenses to $234.76M (+29.3% QoQ/ -14.7% YoY), with the QoQ increase only attributed to the one-time restructuring costs of $40M arising from headcount reduction and cancellation of a stock-based compensation award.

As a result, UPST’s FQ1’23 operating expenses may have very well come in at approximately $195M instead (-5% QoQ/ 16.9% YoY), suggesting an impressive cost optimization after the two rounds of layoffs.

This cadence has naturally improved its contribution margin to 58% (+5 points QoQ/ +11 YoY), implying the efficacy of its AI-led lending platform at a time of peak recessionary fears.

The UPST management has strategically demonstrated the “elasticity” and performance of its platform as well, attributed to the strategic repricing of its newer loans to include the elevated default premiums, temporarily elevating the borrower’s standard for creditworthiness.

Most importantly, the AI-led fintech is able to sustainably generate alpha on its tightened loans during these uncertain periods, as opposed to the higher-volume-lower-margin loans during the recent hyper-pandemic demand and steady-state economy.

In addition, UPST has guided exemplary FQ2’23 numbers, with revenues of $135M (+31.1% QoQ/ -40.8% YoY) and adj EPS of -$0.08 (+82.9% QoQ/ -900% YoY), suggesting a tremendous expansion QoQ. The projected Fed terminal rate of 5.25% may have led to its improved guidance of net interest income of approximately $5M (likely after accounting for adjustments).

Combined with the guided expansion in its revenue from platform/ referral/ servicing fees to $130M (+11.1% QoQ/ -16.4% YoY) for the next quarter, it appears that the AI-led platform boasts well-diversified top-line contributors compared to an interest rate spread only.

As a result, we believe UPST may easily achieve its optimistic guidance of adj. EBITDA break-even in FQ2’23, a feat well-celebrated by its investors, as partly evidenced by the skyrocketing share prices.

This is on top of the fintech’s expanded funding agreements of over $2B through the next twelve months. This is an impressive vote of confidence in our opinion, since most banks have tightened their lending standards after the recent banking meltdown.

This optimistic development may then allow UPST to sustainably grow its loan originations while maintaining peak loans held on the balance sheet at approximately $1B, compared to the current $0.98B reported in FQ1’23 (-2.9% QoQ/ +63.3% YoY).

So, Is UPST Stock A Buy, Sell, or Hold?

UPST 1Y Stock Price

Then again, the high short interest has also tremendously driven up UPST post-earnings call, with the stock already recording an +79.7% rally at the time of writing. We do not expect these optimistic levels to hold in the intermediate term, with the stock likely to recalibrate to the April 2023 top of $17s.

Therefore, while we continue to rate the stock as a Hold for long-term investors, traders may consider taking some gains off the table here. There is no harm in doing so, since the economic downturn may only lift by 2024, if not 2025, triggering further downward pressure on its stock prices.

Meanwhile, we are turning cautiously confident about UPST’s execution in the long term, as evidenced by the optimistic developments thus far. For so long that it maintains a steady pool of funding partners, loan originations may remain decent through the next few quarters, before taking off once the market sentiments lift and the Fed pivots.

For now, UPST has convinced us of its growing moat in the lending market, one that naturally expands its market share, based on the ambitious Total Addressable Market of up to $4T in annual loan originations across Personal, Auto, Home, and Small Business end markets. Considering that the management has had to navigate an overwhelmingly challenging three and a half years, the execution thus far has been more than commendable indeed.

Therefore, we may consider adding the stock over the next few quarters, though sized appropriately due to its volatility and the fintech’s lack of GAAP profitability thus far. For now, we prefer to wait and see.