FTSE 100 pharmaceutical giant AstraZeneca (LSE: AZN) has been a reliable performer in recent years. A £1,000 investment in AstraZeneca shares at the start of 2022 would be worth £1,225 today.
Investors who have taken a Foolish long-term approach have done even better. A £1,000 investment five years ago would be worth a healthy £2,110 today, plus dividends.
I’d like to add some more healthcare exposure to my portfolio. Can AstraZeneca keep climbing, or is this high-flyer at risk of a sharp correction?
Good progress
AstraZeneca’s sales growth has picked up pace over the last couple of years. Annual revenue has risen from $24bn in 2019, to $44bn over the 12 months to 30 June.
Admittedly, this growth has been helped by some one-off changes. The $39bn takeover of US firm Alexion added $3bn to revenue during the second half of 2021. Sales of the Covid-19 vaccine contributed almost $4bn last year.
However, one of the main attractions for me is that it isn’t reliant on just a handful of core products. In 2021, the company had 13 blockbuster medicines — those with sales of more than $1bn.
This diversity is a key attraction, in my view. It should mean that even if AstraZeneca suffers disappointing results from individual medicines, the company as a whole can still deliver reliable profits.
More growth ahead?
The acquisition of Alexion was a big deal, even for a £150bn company like AstraZeneca. Alexion isn’t the only acquisition this business has made in recent years, either.
CEO Pascal Soriot has now launched a $2bn restructuring programme to streamline and integrate the expanded business. He expects to achieve cost savings that will add $1.2bn to pre-tax profits each year by 2025.
Broker forecasts suggest that the group’s sales growth will slow during this period. However, City analysts expect that AstraZeneca’s profits will surge as costs fall and sales of key blockbuster drugs continue to grow.
The latest estimates I can see suggest that the shares could be trading on just 13 times 2024 forecast earnings.
Are the shares good value?
I’m pretty sure that this business can continue to develop successful new medicines and generate returns for its shareholders.
Based on current forecasts, I think that AstraZeneca shares could still offer good value on a long-term view.
Despite this, I’m probably not going to buy at the current £100 share price. The reason for this is that I don’t think the current valuation offers enough of a margin of safety.
As things stand today, AstraZeneca shares trade on nearly 18 times 2022 forecast earnings and offer a dividend yield of just 2.5%.
If earnings continue to rise in line with forecasts, I think this could be a fair price. But if it disappoints the market in any way, I think the shares could fall sharply.
I’d prefer to invest when the market is already feeling cautious. To buy AstraZeneca, I’d be looking for a share price under £85. That would lift the dividend yield above 3% and provide a more attractive margin of safety, in my view.