Many investors who focus on a low price-to-earnings (P/E) ratio and high dividend yield in their search for value will have a hard time swallowing the maxim legendary investor Warren Buffett lives by: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Today, I’m considering whether FTSE 100 pharmaceuticals firm AstraZeneca (LSE: AZN) (NYSE: AZN.US) is a ‘wonderful’ company, and whether its shares are trading at a ‘fair’ price.
A wonderful company?
A number of times during the late 1990s/early noughties Buffett lamented missing out on pharmaceuticals when the sector was out of favour some years earlier. On one occasion he said that, while it wasn’t within his competence to pick a single pharma company, “we probably should have recognized the fact that some sort of group purchase might have made sense”.
Fast-forward to February 2008. Buffett’s Berkshire Hathaway investment company revealed it had bought $76m worth of shares in top UK pharma firm GlaxoSmithKline and $162m worth of shares in French drugs giant Sanofi-Aventis (now simply Sanofi). Berkshire had also recently built a substantial multi-billion-dollar holding in US titan Johnson & Johnson.
It strikes me that the companies chosen for Berkshire’s pharma basket have two things in common: first, these firms are the number one drugs companies of their respective countries; and, second, in addition to pharmaceuticals they each have consumer healthcare (over-the-counter) divisions — containing the kind of strong brands that Buffett just loves.
In contrast, AstraZeneca is the second-fiddle pharma of the FTSE 100, and an out-and-out prescription-drugs player.
Not only did Berkshire fail to pick AstraZeneca for its basket of pharmaceuticals five years ago, but also it seems Buffett may have now changed his view on the sector as a whole. Recent sales of Johnson & Johnson, GlaxoSmithKline and Sanofi have seen Berkshire’s holdings of these three companies reduced almost to zero.
It is, I suppose, possible that it’s not the sector that’s become a problem, but that different company-specific issues happen to have emerged at all three firms — certainly, in the case of Johnson & Johnson, Buffett has publicly stated, “too many mistakes have been made” — or, perhaps it’s a question of individual-company valuation.
A fair price?
At a recent share price of 3,437p, AstraZeneca is trading on 12.2 times forecast 2014 earnings compared with GlaxoSmithKline’s 13.5. Indeed, AstraZeneca is cheaper on most valuation measures. However, it’s not so much cheaper than a sector-rival Berkshire has been actively selling. What’s more, I’ve found no indication that AstraZeneca has ever been, or is now, on Buffett’s ‘wonderful-company’ radar screen.