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Lehigh University *

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Finance

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Jan 9, 2024

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docx

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2

Uploaded by JudgeArtMandrill31

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Jackie You First and foremost, I am deciding to sell the stocks for my primary company, Pfizer. Pfizer is a leading pharmaceutical company dedicated to researching and developing innovative medicine and other healthcare products. Their company has a large global presence, attracting attention within multiple markets. They create value for their customers by providing good reports on returns, providing incentives for investors to finance the company. After doing some statement analysis, I have noticed some ratios that are projecting a positive scenario for Pfizer. First, the Return on Equity (ROE) showed an increase from 20.3% in 2021 to 32.4% in 2022. This states that the company is effective in generating profit relative to their equity base. Additionally, the increase in ROE reveals that it may hold a competitive advantage within the market, positioning itself in a strong spot that generates higher profits compared to its competitors. In that case, Pfizer is generating sufficient returns which, relative to investors, means that they look attractive. Subsequently, one of our main competitors, Johnson & Johnson records a declining ROE from 49.3% to 46.4% within the same fiscal year reports. While the numbers are higher, the declining rate is not wide. Furthermore, internally this may mean the company is suffering from some poor management during the year, resulting in a potential decrease in profit. Pfizer’s Return on Assets (ROA) also dictates a similar case, with an increase from 9% in 2021 to 15% in 2022. Compared to J&J’s results, which show a decline from 20% to 19%, Pfizer is showcasing a positive outlook in terms of utilizing their assets to gain sales. However, the 1% decrease may simply mean that J&J managed to minimize any loses while possibly maintaining a steady level of return, even if it was a decrease, the company may be able to return from the decline. Fortunately, Pfizer has a lower P/E ratio of 5.86 compared to J&J’s P/E ratio of 11.85. This means that investors are willing to pay more per dollar for J&J. As a result, people may perceive J&J as having higher potential growth rates. However, I believe the P/E ratio does not underscore the complete picture of the company. While the P/E may represent growth rates and market conditions, most investors would need to accompany this ratio with others to make a clear distinction. As a result, since Pfizer’s P/E ratio is low compared to J&J's, it may be perceived as undervalued or simply due to investors not willing to invest any higher. Similarly, J&J’s Price to Sales (P/O) ratio is significantly higher at 4.37 compared to Pfizer’s recorded 1.64. By taking this into account, I can further encourage selling Pfizer’s stocks. The reasoning behind this is due to people valuing J&J’s market cap at a higher multiple than Pfizer's. This means that investors may potentially pay more for J&J’s stocks, reflecting confidence within the company’s revenue generating capacity. All else considered, both P/E and P/O produce a positive outcome for J&J, which is why I want to sell my Pfizer stocks. To further back my position, I want to include additional ratios such as the Receivable Turnover (RT), Quality of Income (QoI), and the Cash Ratio (CR). RT for Pfizer decreased from 1.02 in 2021 to 0.98 in 2022, indicating a longer-than-average collection or management of accounts receivable. This could be due to bad customer behavior, signifying potential conflicts between the company and its consumers or partners. Meanwhile, J&J experienced an opposite change from 0.97 in 2021 to 1.03 in 2022, implying an increase in efficiency in collecting
accounts receivables and cash management. This change may not be significant, however, as the RT may be adjusted due to simple changes in term dates. Thus, to further back my claim, I want to provide a correlation between RT and the QoI. The QoI for Pfizer experienced a major decline from 1.85 to 1.04, meanwhile, J&J experienced a minimal decline from 0.63 to 0.61. While the numbers are larger for Pfizer, we need to look at variations to understand what may be hidden. Keep in mind that J&J had an increase in RT, which my observations indicate that J&J can collect cash more efficiently, but at the same time, earn most of its income from core-operating activities. This leads me to the conclusion that J&J has strong management, which correlates to a strong company. Pfizer's major decline in QoI indicates that a smaller proportion of income arises from its core operating activities. Along with a decline in RT, I believe that Pfizer is going to experience conflicts in the future with a possible decline in income. Furthermore, J&J’s cash ratio experienced an increase from 0.39 in 2021 to 0.40 in 2022. While the change is not significant, the increase tells me that J&J was able to maintain its ability to cover liabilities with cash. This means they had sufficient funds, which correlates again to good cash management. On the other hand, Pfizer experienced a significant drop from 0.11 in 2021 to 0.01 in 2022. Therefore, their ability to cover costs with available cash must have been inefficient. Ultimately, the financial health of J&J stands to be better than Pfizer which is why I believe I should sell my stocks. In the news, Johnson & Johnson has also partnered with the world's largest human genome sequencing project, allowing scientists to further increase their research opportunities to gain a better understanding of genetic disorders, diseases, and mutations. As of November 30, 2023, an article released by Johnson & Johnson states that with the support of J&J, the “UK Biobank Whole Genome Sequencing (WGS) Project” unveiled data from the whole sequencing of its 500,000 volunteers. Trevor Howe, Ph.D. states that scientists can apply to use this large data set... to combine information about several genome variants and more accurately predict disease risks. 1 The availability of this massive data set could expedite research as Johnson & Johnson becomes a massive influencer on the healthcare industry. This not only confirms my position in selling my Pfizer stocks but also encourages me to buy J&J stocks in the coming future. 1 Brody, Barbara. “Harnessing the Human Genome Is the Future of Healthcare-and Johnson & Johnson Is Helping Lead the Way.” Content Lab (U.S), November 30, 2023. https://www.jnj.com/innovation/human- genome-healthcare-jnj-forefront .
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