The Fed Monetary Policy for 2019 and Its Impact on Pfizer
U.S. Economic Conditions in 2019
The 2019 financial year was the last strong period for the U.S. economy before the rapid global spread of the COVID-19 virus. According to the Board of Governors of the Federal Reserve System (2020), the unemployment rate reduced from 3.9% at the end of 2018 to 3.5% in December 2019. The economic growth pushed inflation below the estimated 2% mark. Consequently, the Fed lowered the interest rate by 75 basis points, bringing it to the 1-1/2 and 1-3/4 percent range (Board of Governors of the Federal Reserve System, 2020). Ultimately, the Fed intended to support the expansion of economic activity while preserving strong labor market conditions.
Pfizer’s Financial Strategies in Response to Economic Trends
The Fed’s decisions throughout the 2019 financial year impacted Pfizer in two ways. Firstly, Pfizer continued utilizing derivative financial instruments to hedge or offset the fixed interest rates on hedged assets. While most of the loans were still taken on a long-term, fixed-rate basis, Pfizer increased the amount of notional derivative instruments from $23 to $25 billion (Pfizer, 2019). Secondly, Pfizer (2019) offered temporary enhancements to certain employee benefits. One can assume this step was taken to reduce employee turnover in a strong labor market, where employers have to compete for talent.
Market Pressures and Strategic Priorities for Pfizer
Lastly, Pfizer was affected by several essential market conditions independent of the Fed’s policy. In particular, the company had to develop a commercial strategy to counter potential cost-containment measures imposed by the governments, such as mandatory price cuts, rebates, and international reference pricing (Pfizer, 2019). Research and development (R&D) and intellectual property rights directions were prioritized at the end of the 2019 financial year (Pfizer, 2019). In that regard, regulatory measures and international competition were Pfizer’s most concerning market conditions in 2019.
Performance Comparison
Price-to-Book Ratio
The price-to-book (PB) ratio demonstrates the company’s value by comparing its market capitalization to its book value. On December 31, 2018, Pfizer’s PB ratio was at 3.17. By December 31, 2019, the PB ratio of Pfizer had reduced to 2.87 (Macrotrends, 2023a). Such a decline might indicate that Pfizer stock used to be overvalued in 2018 and returned to a more objective value in 2019.
Price-to-Earnings Ratio
The price-to-earnings (PE) ratio reflects the relative value of the company’s shares. On December 31, 2018, Pfizer’s PE ratio was 18.93. On December 31, 2019, it reduced to 11.68. The stock price fell from $35.39 on December 31, 2018, to $32.94 on December 31, 2019, while the earnings per share increased from $1.87 to $2.82 (Macrotrends, 2023b). Overall, one can claim that Pfizer stock has become less overvalued.
Return on Assets Ratio
The return on assets (ROA) ratio indicates the company’s profitability relative to its total assets. In that regard, Pfizer substantially improved throughout the 2018-2019 financial year. On December 31, 2018, Pfizer’s ROA was 6.79%. By the end of 2019, the ROA increased to 9.87% (Macrotrends, 2023c). In simpler terms, Pfizer earned over 3 cents more from each dollar of income compared to the end of the 2018 numbers.
Return on Equity
Lastly, Pfizer’s return on equity (ROE) — the ratio demonstrating the company’s efficiency at profit generation, has improved significantly throughout the 2018-2019 financial years. On December 31, 2018, Pfizer’s ROE was at 16.16%, with an income of $11.15 billion and shareholders’ equity of $63.67 billion. ROE surged to 25.86% in a year, as Pfizer’s income increased to $16.03 billion (Macrotrends, 2023d).
Summary
The combination of the four financial ratios allows one to state that Pfizer had a solid 2019 financial year despite the stock price reduction. The company increased its overall profitability and profit-generation efficiency, remaining one of the leaders of the global pharmaceutical industry.
References
Board of Governors of the Federal Reserve System. (2020). Monetary policy and economic developments. Web.
Macrotrends. (2023a). Pfizer price to book ratio 2010-2022 | PFE. Web.
Macrotrends. (2023b). Pfizer PE ratio 2010-2022 | PFE. Web.
Macrotrends. (2023c). Pfizer ROA 2010-2022 | PFE. Web.
Macrotrends. (2023d). Pfizer ROE 2010-2022 | PFE. Web.
Pfizer. (2019). Appendix A. 2019 financial report. Web.