Nearly a year ago, reports surfaced that Pfizer (NYSE: PFE) was considering selling or spinning off its consumer healthcare business. But those were just reports. Nothing happened -- until now.
On Tuesday, Pfizer officially announced that it was "reviewing strategic alternatives" for its consumer healthcare business. Those alternatives include a sale, a spinoff, or ultimately keeping the business within Pfizer. Shareholders should be cheering for the first two options. Here are three reasons why Pfizer investors will win if the company decides to sell or spin off its consumer business.
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1. A sale would generate a lot of cash -- and a spinoff would generate a lot of excitement
Last year, when Pfizer was reportedly thinking about selling its consumer healthcare unit, sources told Reuters that the company thought it could fetch as much as $14 billion. That price seems about right. In 2016, Pfizer's consumer segment made $3.4 billion in revenue. It's on track to make roughly the same amount this year. A $14 billion price tag would translate to a price-to-sales ratio of a little over four, right where Pfizer's overall price-to-sales ratio currently stands.
If Pfizer does sell the consumer unit, the deal would generate a lot of cash, even after taking out taxes. Should the company use that cash to make smart acquisitions, it would definitely be beneficial to investors.
But what if Pfizer takes the spinoff route? Investors could win in that scenario, too. The last time Pfizer spun off a business was in 2013 with animal health business Zoetis (NYSE: ZTS). Since then, Zoetis stock has more than doubled, while Pfizer stock is up a little over 30%. There's no way to know how well a consumer healthcare spinoff might perform, but I have no doubt that investors would be quite excited if Pfizer opted to spin off the consumer business.
2. Earnings growth would improve
Earnings growth is the fuel that drives stocks higher. Separating out the consumer healthcare business, either through a sale or a spinoff, would allow Pfizer to grow earnings more quickly. How?
Imagine pedaling a bicycle with enough force to go 20 miles per hour. However, you have a small child on the bike with you who isn't pedaling, so you actually only go 15 miles per hour. If you stop, hand the child to its parent, and resume pedaling like you were before, your speed would pick up to 20 miles per hour.
That's a pretty good analogy for where Pfizer is now. The company's innovative health segment is growing. Consumer healthcare is in the innovative health segment, but the business hasn't been growing lately. If you take the nongrowing smaller part out of the mix, the remaining business would have even stronger growth.