The AstraZeneca (LSE: AZN) share price has smashed the FTSE 100 over one, three, five and 10 years. However, this blue-chip growth stock has underperformed more recently. On a six-month view, it’s down 14%, compared with a 10% rise in the index.
Is AstraZeneca a top ‘dip buy’ for me today, and should I jump at the chance to invest at the current share price?
Key changes
I’ve been wary of AstraZeneca’s valuation in recent years. Indeed, when I last covered the stock (May last year), I rated it a ‘sell’. At a share price of 9,004p, I calculated its valuation as somewhere between far too rich and grossly overvalued.
However, for me, two key things have changed. First, the AstraZeneca share price is now 20% lower at 7,226p. And second, the company has recently issued its latest annual report. This has enabled me to reassess a feature of AZN’s earnings that I previously felt had been flattering its performance.
AstraZeneca’s shares priced on ‘core’ numbers
AstraZeneca gives investors an idea of the underlying financial performance of the business using what it calls ‘core’ numbers. I’m okay with most of the adjustments the company makes to its statutory results to arrive at its core numbers. However, I take issue with one.
AZN books one-off gains from disposing of non-core drugs as core operating profit. In my view, this doesn’t accurately reflect the underlying performance of the ongoing business. It flatters it.
By 2018, such disposals accounted for £1.9bn (a full third) of AZN’s £5.7bn core operating profit. I was encouraged to see this moderate to around a fifth in 2019. And following the recent 2020 results, the table below brings the position up to date.
|
 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
|
Statutory operating profit ($bn) |
2.1 |
4.1 |
4.9 |
3.7 |
3.4 |
2.9 |
5.2 |
|
Adjustments (before gains on disposals) (£bn) |
4.8 |
1.8 |
0.5 |
1.7 |
0.4 |
2.3 |
1.1 |
|
My core operating profit (£bn) |
6.9 |
5.9 |
5.4 |
5.3 |
3.8 |
5.2 |
6.3 |
|
Gains on disposals (£bn) |
0.0 |
1.0 |
1.3 |
1.5 |
1.9 |
1.2 |
1.0 |
|
AZN core operating profit (£bn) |
6.9 |
6.9 |
6.7 |
6.8 |
5.7 |
6.4 |
7.3 |
|
Gains on disposals as % of AZN core operating profit |
0 |
14 |
19 |
22 |
33 |
19 |
14 |
I’m further encouraged to see another reduction (down to 14%) in the contribution of gains on disposals in 2020. I think AZN’s core numbers are beginning to better reflect the underlying performance of the ongoing business.
AstraZeneca share price and valuation
How has the change in AstraZeneca’s share price and publication of its latest annual results affected the valuation of the stock since I last wrote about it?
|
 |
P/E May 2020 |
P/E today |
|
Statutory |
107 |
42 |
|
My core |
40 |
32 |
|
AZN core |
31 |
26 |
The fall in AstraZeneca’s share price and an increase in its earnings at growth-stock rates (mid/high teens on both my and AZN’s numbers) have made the price-to-earnings (P/E) ratios much more appealing today. Furthermore, they become more attractive still looking forward. Management has guided on earnings growth of between 18% and 24% for 2021.
Risk and reward
Of course, there’s a risk the company’s impressive line-up of new medicines may not deliver the level of growth management, analysts and the market are currently expecting. In which case, the AstraZeneca share price could de-rate further.
In addition, there’s a risk that wasn’t present when I covered the stock last year. The company is set to buy US group Alexion Pharmaceuticals in a $39bn deal. Such mega-acquisitions are complex and don’t always create the new shareholder value management anticipates.
On balance though, weighing my personal appetite for risk and reward, I am looking at today’s AstraZeneca share price as a top FTSE 100 ‘dip buy’ opportunity.