2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like AstraZeneca (LSE: AZN) (NYSE: AZN.US) still offer good value, after five years of market gains.
Back to basics
AstraZeneca’s share price has risen by 16% this year, putting slightly ahead of the FTSE, but its patent cliff troubles mean that it’s only gained 12% over the last five years, leaving it lagging behind the FTSE.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of AstraZeneca today, we need to ignore historic price movements and look at what our money will buy today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 10.5 |
| Trailing dividend yield | 5.0% |
| Operating margin | 24.0% |
| Net gearing | 5.6% |
On the face of it, AstraZeneca shares look good value, but as we shall see in a moment, buyers have to factor in at least one more year of declining earnings and flat dividends, before any growth is expected.
On the positive side, Astra’s operating margin of 24% is pretty healthy (albeit lower than previous years), its dividend remains covered by earnings, and it has one of the lowest levels of gearing in the FTSE 100. This isn’t a company that’s at risk of going under.
Will AstraZeneca bottom out in 2014?
AstraZeneca is feeling the effects of the patent cliff somewhat later than its main UK peer, GlaxoSmithKline. Here’s how the company looks based on consensus forecasts for 2014:
| Metric | Value |
|---|---|
| 2014 forecast P/E | 12.1 |
| 2014 forecast yield | 5.0% |
| 2014 forecast earnings growth | -7.9% |
| Dividend cover | 1.7 |
The big question for Astra investors is whether the firm will kick-start new growth with a significant acquisition. The most recent suggestion, in the Financial Times last week, was that Astra might purchase Forest Laboratories, a $15bn US firm.
Astra’s low debt levels mean that it could easily afford to take on some additional borrowing to help fund such a purchase, and I believe that a major acquisition is likely next year. In the meantime, Astra’s strong finances, high yield and intellectual clout make it a buy, in my opinion.