Amidst the broader market volatility, investors are likely to be more selective as to which stocks to add to their portfolio in 2019. If you believe in holding shares for the long term, I’d suggest that you take a closer look at AstraZeneca (LSE: AZN) shares as part of your healthcare portfolio.
Year-to-date, AZN’s share price is up about 10%, despite the market volatility. Let’s take a closer look at the fundamentals that are supporting the strong performance of the shares.
Robust earnings
The company is one of the largest, most innovative pharmaceutical companies globally. Its latest earnings release in November showed a strong balance sheet and positive outlook going into 2019. Chief executive Pascal Soriot confirmed expectations that the company is to grow both organically and possibly through acquisitions — which it can afford thanks to its cash flow. Analysts are now looking for a 10%+ earnings per share (EPS) increase in the New Year.
In addition to a robust balance sheet and growing profits, the dividend yield of 3.3% makes it a worthwhile pick for risk-averse income investors who know that they can compound their returns through reinvesting dividends.
Broad pipeline
The firm’s R&D and manufacturing focus lies in cancer (oncology), cardiovascular, gastrointestinal, infection, neuroscience, and respiratory, and inflammation segments. Lynparza, Tagrisso, and Brilinta are new drugs that analysts expect to contribute to the top line.
It has several prospective drug launches in the cancer, metabolism and respiratory areas, such as Imfinzi — prescribed against lung cancer. And it is exploring new avenues for growth too. In November it announced a partnership with the Belgian Biocartis Group — a molecular diagnostics company — for obtaining lung cancer diagnostic biomarker results. Its cancer focus has seen it selling its anaesthetics medicines, as well as its antibiotics division, to raise cash for what it sees as its core areas.
What could derail the shares?
On December 11, the UK parliament will vote on the Prime Minister’s proposed Brexit deal. If the government loses the vote, the country will face more uncertainty — and that would be likely to that negatively affect the FTSE, the pound and possibly AstraZeneca shares, in spite of its strength so far this year.
Like most large pharmaceutical companies, it also faces continuous risks from generic drugs competition, especially for its Nexium, Crestor, and Seroquel brands. That means some investors may see a P/E ratio of 25 as a bit rich. Personally, I think its pipeline is strong enough to offset any threat to the bottom line.
If the share price does suffer in 2019, I would expect to see yet another takeover bid from Pfizer. In 2014, the board rejected a £55-per-share offer made by the US company but AZN’s drive to become a leader in oncology treatments means many analysts both in the UK and the US would not be surprised to see yet another offer from its erstwhile suitor.
The bottom line on the shares
AstraZeneca is a fundamentally sound company with a good track record of R&D and commercialisation success – two factors that translate into a strong balance sheet and double-digit bottom line growth next year. With a beta of around 0.65 (meaning it is one of those stocks that are less volatile than the broader market), I think it could be a strong pick for another downleg or a possible bear market in 2019.