Is AstraZeneca plc a falling knife to catch after dropping 15% today?

I didn’t expect to wake up this morning to see a 15% drop in the AstraZeneca (LSE: AZN) share price, but that’s what’s happened. The price has dipped to 4,282p, bringing this year’s bullishness to an abrupt halt. 

One of the company’s big new hopes, a study into a new cancer drug candidate that was hoped to become a first-line treatment as an alternative to chemotherapy, has disappointed. The trial showed that the drug combination “did not meet a primary endpoint of progression-free survival compared to chemotherapy” — in other words, there was no benefit over chemotherapy.

Rumours that chief executive Pascal Soriot is set to leave the company whose strategic turnaround he has been pioneering haven’t helped, and he so far appears not to have directly commented on the suggestion.

Interim results seem like a bit of a distraction right now, but they’re in line with full-year forecasts. Revenue for the half dropped by 11% (9% at constant exchange rates), though core operating profit rose by 7% with core earnings per share up 5%. The interim dividend was maintained at 90 US cents per share with “guidance for 2017 reiterated“.

How bad is it?

How much of a blow is the trial failure? Seen against the background of AstraZeneca’s wide drugs pipeline, I don’t see it as the catastrophe that some do. Even after today’s drop, the shares are still up 39% over the past five years of transformation, and dividends have been going steady at better than 4%.

With the shares on a forward P/E of 15, and a drugs pipeline that’s only just starting to mature, AstraZeneca is seriously starting to look like a takeover candidate — and even the departure of Mr Soriot shouldn’t dent that too much, with most of his refocusing work already done. 

A good buying opportunity, I reckon.

Recovery pick

Looking at another recovering FTSE 100 company whose share price revival has faltered a little of late, I’m starting to like the look of Anglo American (LSE: AAL).  The strong share price gains of 2016 started to reverse in 2017, but in the past month we’ve been seeing the signs of another bull run — and I reckon it’s set to continue over the longer term. 

My optimism was boosted Thursday by the firm’s first-half results, which heralded the return of the much-missed dividend, after $2.7bn in free cash flow helped to get net debt down to $6.2bn. Sure, $6.2bn isn’t small change, but that’s almost a 50% reduction since the same time last year, with gearing at a relatively modest 19% and the net debt figure representing around 80% of annualised EBITDA.

Dividends back

Chief executive Mark Cutifani spoke of “a further 20% increase in productivity, [and] a 68% increase in underlying EBITDA,” pointing to keen control of capital expenditure and improving prices as being the main drivers.

With a resumption of dividends “at a targeted level of 40% of underlying earnings” six months earlier than expected, amounting to 48 US cents for the half, full-year forecasts of a 3.8% yield are now looking unduly modest.

Even accounting for Anglo American’s still-high net debt levels, a forward P/E of only a little over seven based on the current year’s forecasts looks too low to me, and I’m seeing another FTSE 100 buying opportunity.