Back in 2012, AstraZeneca (LSE: AZN) (NYSE: AZN.US) was priced for disaster. Investors expected the firm’s profits to fall off the patent cliff, and the firm’s shares were trading on a trailing P/E of around 6 times earnings, with a yield of more than 6%.
Smart investors like Neil Woodford were loading up with AstraZeneca shares, which have since gained nearly 60%, despite the firm’s pre-tax profits falling by more than 70%.
Today, it’s a different picture: much of AstraZeneca’s likely future recovery has now been priced into the stock, and the Anglo-Swedish firm’s shares trade on a more demanding rating of 16.1 times 2015 forecast earnings.
In my view, GlaxoSmithKline is now a more attractive buy, despite the firms’ superficially similar valuations.
1. Glaxo may be cheaper
Glaxo shares currently trade on a 2015 forecast P/E of around 16, as do those of AstraZeneca.
However, using other metrics, Glaxo looks cheaper: AstraZeneca’ operating margin of 8% is half the 15% operating margin achieved by Glaxo last year.
It’s also worth noting that Glaxo’s current share price includes approximately 163p of cash returns planned for 2015 — equivalent to a chunky 10.5% yield. This is made up of the firm’s ordinary dividend (5.2% prospective yield) plus a planned 82p per share cash return, following the completion of Glaxo’s big deal with Novartis later this year.
2. Growth catalyst
Indeed, I believe that last year’s deal with Novartis will go a long way towards addressing the concerns investors have raised about Glaxo’s recent performance.
The concept behind the Novartis deal is to allow both firms to strengthen their positions in key markets.
There are three strands to the deal: Novartis will buy some of Glaxo’s new cancer medicines, Glaxo will buy Novartis’ portfolio of vaccines, and both companies will combine to form a new consumer healthcare business that will control many of the world’s best-known brands.
3. One step ahead
I believe the Novartis deal will give Glaxo a head-start over AstraZeneca in terms of new growth.
I’ve little doubt that AstraZeneca will eventually manage to develop its own solution to the growth problem, but my feeling is that Glaxo will get there first — and that after a difficult year in 2014, this potential is not currently reflected in GlaxoSmithKline’s share price.