AstraZeneca (LSE: AZN) has released a slew of positive drug updates over the summer, and its shares have been making new all-time highs. Investors have become increasingly excited about its pipeline, and a return to top- and bottom-line growth.
However, I think we’re looking at a case of market over-exuberance. In this article, I’ll explain why I believe the stock is far too highly rated, and why I’d rather invest in gene-editing firm Horizon Discovery (LSE: HZD) where I see not only exciting growth prospects, but also an attractive valuation.
Now bigger than GSK
Remarkably, within the last year, AstraZeneca has overtaken long-time bigger FTSE 100 peer GlaxoSmithKline. AZN’s market capitalisation currently stands at £94bn (up from £57bn five years ago), while GSK’s is £83bn (up from £70bn five years ago).
AZN trades at 4.9 times current-year forecast sales of $24bn (£19.2bn at current exchange rates), while GSK is rated at just 2.5 times its far higher forecast sales of £32.6bn.
Cor(e) blimey!
I’ve highlighted AZN’s sky-high price-to-sales multiple relative to its rival, because I believe AZN’s preferred ‘core’ earnings measure overstates its real core earnings. In recent years, AZN has divested numerous non-core older drugs, but included the profits from these in its ‘core’ earnings. My sums say this has plumped up core earnings by between 20% and 33% a year.
The company has guided on core earnings per share of $3.50 to $3.70 (288p at the mid-point) for the current year. The share price of 7,167p represents about 25 times the guided earnings. This is a high multiple as it is, but if what I consider to be real core earnings are 20% to 33% lower, the multiple goes up to between 31 and 37.
Now, AZN’s earnings prospects are good, but not earnings-multiple-in-the-30s good, in my opinion. This is why I’m avoiding the stock.
Transitioning
Founded in 2005, and listed on London’s junior AIM market in 2014, Horizon Discovery is a global leader in cell engineering, using innovative gene editing and gene modulation technologies. Its customers are academic institutions and pharma companies, including AstraZeneca.
Horizon appointed a new chief executive last year — a veteran biotech tools commercial leader — who’s put together a highly experienced team, as the company transitions from building scale to profitable growth.
Credible prospect
Ahead of its latest half-year results, released last week, its shares were trading at 138p. They ended the week at 158p, giving the company a market capitalisation of £238m.
Management reported a strong start to the second half of the year and said it anticipates full-year revenue to be in line with market expectations. These expectations are for £63.8m, meaning the stock is trading at 3.7 times sales, compared with AZN’s 4.9 times.
This time last year, Horizon’s shares were comfortably above 200p, the board having rejected a 181p-a-share offer from Abcam some months earlier. Why can we buy them for just 158p today? I reckon it’s probably down to persistent selling by beleaguered fund manager Neil Woodford, who thankfully now seems to have completed the disposal of his one-time 25% stake in the company.
I think Horizon is a credible growth prospect, and with a valuation of 3.7 times sales and the Woodford overhang finally gone, I rate the stock a ‘buy’.