Argus Slightly Disappointed With Pfizer's Decision Not To Split The Company

Argus is "slightly disappointed" with Pfizer Inc. PFE's decision not to split in to two companies. The brokerage maintained its Buy rating on the stock, citing valuation and M&A prospects.

On September 26, Pfizer announced it would not split into two companies, saying value would be maximized under the existing one-company structure.

"We are slightly disappointed as the stock's performance has been lackluster for years and separating the established and new drug segments may have made them each more profitable," analyst Jacob Kilstein wrote in a note.

Nevertheless, Kilstein remains bullish on Pfizer as he expects the company to continue to strengthen the product pipeline with small acquisitions. Pfizer recently snapped up Medivation for $14 billion to access its $2 billion prostate cancer drug, Xtandi.

In addition, the analyst noted the market undervalues Pfizer's existing pharmaceuticals business as it has strong sellers in Prevnar and Ibrance and works in the fast-growing immuno-oncology area.

"Although the company will not be separating into two public companies, we feel that Pfizer's drug business will perform well as we expect prices and volumes to increase steadily. The company's stock repurchase plan and the attractive dividend yield of about 3.5% add to the total potential return," Kilstein elaborated.

Along with its non-split announcement, management reaffirmed its 2016 adjusted EPS guidance of $2.38-$2.48 and its revenue forecast of $51-$53 billion.

Kilstein cut his 2016 EPS estimate to $2.47 from $2.48, as he expects slightly higher expenses. But, the analyst raised his 2017 estimate to $2.65 from $2.56 to reflect expected contributions from acquisitions.

On the valuation front, the analyst said shares are attractive at these levels. The analyst's target price of $39 implies a P/E of 14.7-times projected 2017 earnings compared to 16.3-times for mature pharma peers.