Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at AstraZeneca (LSE: AZN) (NYSE: AZN.US)
Valuation
First off, let’s take a look at AstraZeneca’s valuation in relation to its sector peers. AstraZeneca currently trades at a historic P/E ratio of 7.9, below the biotechnology sector average of 17.1.
However, as the company is set to lose the exclusive manufacturing rights to a number of treatments during the next few years, City analysts expect AstraZeneca’s earnings to fall next year. As a result, AstraZeneca’s forward P/E ratio is 9.9 — still lower than its sector peers.Â
Balance sheet
| Â | Net-debt-to-assets | Interest cover by operating profit |
|---|---|---|
| AstraZeneca | 5% | 18x |
| GlaxoSmithKline | 34% | 10x |
| Shire | 5% | – |
Although AstraZeneca’s earnings are expected to decline during the next few years, the company is well placed to ride out this trend.
Indeed, AstraZeneca’s balance sheet is strong and net debt only amounts to 5% of assets. What’s more, AstraZeneca is able to cover its interest costs 18 times by operating profit.
This solid financial position has given AstraZeneca a great spring-board for the company to be able to acquire peers and treatments to bolster its flagging pipeline.
In particular, since October last year AstraZeneca has acquired five smaller peers, signed five collaboration deals and commenced two licence deals. Half of these deals are related to cancer treatments.
Company’s performance
| Â | Earnings growth past five years | Net profit margin |
|---|---|---|
| AstraZeneca | 26% | 14% |
| GlaxoSmithKline | 8% | 16% |
| Shire | 317% | 13% |
Moreover, AstraZeneca’s earnings have expanded faster than those of that of close peer GlaxoSmithKline during the past five years. That said, AstraZeneca’s net profit margin, which currently sits at 14%, is down from its five-year high of 30% seen back in 2011.
Still, AstraZeneca’s recent acquisitions and collaborations show that management is working hard to drive the company’s growth and profitability back to historic levels.Â
Dividends
| Â | Current Dividend Yield | Current dividend cover | Projected annual dividend growth for next two years. |
|---|---|---|---|
| AstraZeneca | 5.5% | 2.3 | 2% |
| GlaxoSmithKline | 4.7% | 1.5 | 6% |
| Shire | 0.4% | 7.7 | 38% |
| Sector average | 4.5% | 1.3 | Â |
Furthermore, AstraZeneca currently offers the largest dividend yield out of its close peers. Having said that, City analysts expect AstraZeneca’s payout to expand only 4% over the next two years.
Nonetheless, AstraZeneca’s payout is covered more than twice by earnings, which gives me confidence that the payout will be maintained even if earnings fall.Â
Foolish summary
All in all, AstraZeneca is currently trading at a low valuation in relation to peers, has a clean balance sheet and is working hard to drive growth.
So overall, I feel that AstraZeneca is a much stronger share than its peers.Â