Looking around the FTSE 100 and its cluster of companies with price to earnings (P/E) valuations close to the index’s long-term average of 14, there are some obvious anomalies — some with unusually high values and some unusually low.
Take AstraZeneca (LSE: AZN) (NYSE: AZN.US), for example. At its current price of 4,371p and based on forecasts for the year ending December 2014, it’s on a forward P/E of 17.3. Not only is that higher than the FTSE average, it’s also higher than fellow FTSE 100 pharmaceutical firm GlaxoSmithKline on 15.4.
Looking ahead, for 2015 the two firms are on P/E valuations of 17.8 and 14.1 respectively — AstraZeneca’s rating is rising while GlaxoSmithKline’s is falling.
Mismatch
Combine that with the fact that AstraZeneca is not expected to see earnings rises until 2016 at the very earliest while it’s rival is on for growth next year, and with AstraZeneca’s inferior forecast dividend yield of 3.8% compared to 5.1%, and there’s a clear mismatch.
The obvious difference, of course, is that AstraZeneca has been the target of a takeover attempt by American drugs giant Pfizer, and that pushed the shares even higher — with the bid valuing them at £55 apiece, the price exceeded £48 at one point.
But now that the war for ownership is over, why is the share price still so high?
It could be that investors have woken up to the true long-term potential of new boss Pascal Soriot’s plans for the company and its resurgence pipeline.
Promising developments
The company has been issuing a lot of updates on drug pipeline development over the past few months, telling us of “compelling new data on important mid to late stage assets” in its oncology research amongst other positive news.
And at first-quarter update time, Mr Soriot said he was “pleased with the significant progress we are making towards achieving scientific leadership in our core therapeutic areas“, telling us “We are investing in our rapidly progressing pipeline and the key platforms that are the backbone of our strategy to return to growth. To further concentrate organisational focus, we will continue to redeploy our resources in our core priorities and pursue opportunities that maximise the value of our pipeline and portfolio“.
A new bid?
But no, that’s almost certainly not the only reason for the high share price — for one thing, it would be rare for institutional investors (with a small handful of notable exceptions) to be looking at the long term when most are more focused on how quick they can get rich.
The reality is there’s very likely a fair bit of money still riding on the possibility of a renewed takeover attempt by Pfizer as soon as UK rules allow it.