The shares of AstraZeneca (LSE: AZN) (NYSE: AZN.US), currently trading at around £46, have soared 78% over the last five years, outperforming the FTSE 100, which has gained 53%.
A good chunk of the gain has come on the back of the recent takeover offer from US giant Pfizer. Before rumours of the offer emerged, AstraZeneca’s shares were trading below £38.
While investors buying into the UK firm today at £46 could potentially see a relatively quick gain of 20% if Pfizer sweetened its £50 bid to £55 — and was successful, of course — they could equally see a sharp 20% reversal back to below £38 if the deal failed to go ahead.
Furthermore, I think the shares have the potential to be 33% lower than today’s price in five years’ time.
Here’s how
As most readers will know by now, AstraZeneca’s revenue and earnings have been falling over the last couple of years, due to expiring patent protection on some of its blockbuster drugs. Furthermore, City analysts don’t expect the declines to bottom out until 2017, when earnings per share (EPS) is expected to floor at around 234p.
With last year’s EPS at 306p, and EPS for the year ending December 2018 forecast to be 253p, we’re looking at a compound annual growth rate of minus 3.7%.
If we were generous, and rated AstraZeneca’s 2018 EPS of 253p at the FTSE 100’s long-term average historic P/E of 16, we’d see the share price at around £40.50 — 12% lower than today.
Gloomy scenario
But, if takeover talk was off the agenda, and the gloomy earnings scenario played out according to analysts’ forecasts, it wouldn’t be too hard to imagine AstraZeneca rated on the P/E it was at before Pfizer’s recent interest; namely 12.3. If that were to be the case, the shares would be trading at not much more than £31 five years from now — 33% lower than today.
The negative return would be mitigated by dividends, although the most bearish analysts are forecasting a cut within the next couple of years. Still, taking the consensus, we’d see 844p paid out over the period. Put another way, a £1,000 investment in AstraZeneca today would deliver £184 in dividends. Pretty decent income, but little compensation for a potential capital fall of 33%.
Long-term shareholders who’ve cashed-in for a good return on the back of Pfizer’s offer will be delighted, but anyone buying into AstraZeneca at the current price faces the risk of a short, sharp shock and a very long-haul recovery if the takeover goes pear-shaped.