AstraZeneca (LSE: AZN) (NYSE: AZN.US) shares remain 20% higher than they were at the start of the year, despite having fallen by 10% since the firm’s board rejected a £55 per share takeover bid from US giant Pfizer.
Now that AstraZeneca’s valuation has cooled off somewhat, are the shares a buy again, or are they still too pricey?
I’ve taken a closer look at AstraZeneca’s performance and valuation to find out more.
Valuation
Let’s start with the basics: how is AstraZeneca valued against its past earnings, and the market’s expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
10.6 |
|
2-year average forecast P/E |
16.5 |
Source: Company reports, consensus forecasts
The picture painted here is clear: AstraZeneca’s near-term earnings are expected to fall substantially below the firm’s historical average, but this is not expected to be a permanent decline.
Investors are willing to credit AstraZeneca for future growth, and are also pricing in the possibility of a second bid attempt by Pfizer, which some — including star fund manager Neil Woodford,– believe is likely.
What about the fundamentals?
Buying into a company whose share price is already priced for a bid is a risky strategy.
After all, AstraZeneca’s share price has fallen by 6% since 23 September, when changes to US tax rules made a bid less financially attractive for US companies. Should Pfizer categorically rule out a second bid, I’d expect AstraZeneca shares to take another tumble, back towards the £38 level they traded at before Pfizer’s bid interest became public.
Given all of this, do AstraZeneca’s fundamentals support a buy at today’s price?
|
Metric |
5-year compound average growth rate |
|
Sales |
-4.8% |
|
Core operating profit |
-9.2% |
|
Core earnings per share |
-4.4% |
|
Dividend |
+4.5% |
Source: Company reports
For me, AstraZeneca’s falling sales and profits over the last five years would normally be a warning flag — buying into a firm with a high forecast P/E and falling sales isn’t usually a great idea.
However, AstraZeneca remains a world leader in certain areas and is a very large — and still profitable — company, offering a 4% yield. I believe that the firm’s turnaround will ultimately be successful, and will generate substantial value for shareholders over the next five to ten years.
Buy AstraZeneca?
In the short term, however, I plan to wait and see if AstraZeneca gets any cheaper: this might mean missing out if Pfizer does make a second bid, but as a long-term income investor, I’m more interested in locking in a strong long-term income when I trade, rather than speculating on one-off takeover gains.
I rate AstraZeneca as a hold, as for me it is not quite cheap enough to discount the expectation of further declines in sales and profits.