The AstraZeneca (LSE: AZN) share price is a long way from being the hardest hit in this market crash. It ended yesterday at just over 7,000p. This is down 9% from its pre-crash level on 21 February, and 11% below its all-time high of 7,878p printed in January.
However, because big FTSE 100 pharma firms have defensive qualities, and healthcare is an industry with long-term structural growth drivers, we shouldn’t expect a company like AZN to suffer as badly as stocks in more cyclical or structurally-challenged sectors. Therefore, we should ask whether AZN’s current discount share price is a bargain for a stock of its quality.
Debased coinage
Fund manager Mark Slater — son of the late Jim Slater (author of best-selling investment book The Zulu Principle) — recently savaged companies’ “adjusted earnings per share” numbers as “a debased coinage.”
Most companies headline such numbers in their results, and most analysts and investors use them to value the business. Almost invariably, these numbers portray a more flattering picture of the company’s performance than statutory EPS.
I’ve previously suggested AstraZeneca’s adjusted EPS — it calls it ‘core’ EPS — is one of the most egregious around. Don’t get me wrong, I think AZN is a quality business with a sound strategy, but, for a good while, I’ve felt the shares have been over-valued on a true view of underlying EPS.
However, after the recent fall in the share price, do I think the valuation is now attractive?
Smoke and mirrors revisited
I last wrote about AZN after its Q3 results last year. In that article, I showed how the company books one-time gains on disposals of non-core drugs as ‘core’ operating profit. I pointed out that such disposals had increased from £0 in 2014 to £1.9bn in 2018, with the latter representing a whopping 33% of AZN’s ‘core’ operating profit for the year.
On a positive note, I suggested it looked like certain disposals for 2019 would be lower, and that what I consider true core earnings would increase for the first time in five years. We now have AZN’s 2019 results, and the table below brings the position up to date.
|
 Year |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Statutory operating profit (£bn) |
2.1 |
4.1 |
4.9 |
3.7 |
3.4 |
2.9 |
|
Adjustments (before gains on disposals) (£bn) |
4.8 |
1.8 |
0.5 |
1.7 |
0.4 |
2.3 |
|
My core operating profit (£bn) |
6.9 |
5.9 |
5.4 |
5.3 |
3.8 |
5.2 |
|
Gains on disposals (£bn) |
0.0 |
1.0 |
1.3 |
1.5 |
1.9 |
1.2 |
|
AZN core operating profit (£bn) |
6.9 |
6.9 |
6.7 |
6.8 |
5.7 |
6.4 |
|
Gains on disposals as % of AZN core operating profit |
0 |
14 |
19 |
22 |
33 |
19 |
As you can see, gains on disposals in 2019 were indeed lower, both in absolute terms (£1.2bn), and as a percentage of AZN’s core operating profit (19%). This is a move in the right direction, so how is the company’s price-to-earnings (P/E) valuation looking today?
Getting there
AZN’s EPS for 2019 came in at $3.50 (267.2p at current exchange rates) on the company’s own core measure. It worked out at $2.75 (209.9p) on my core measure, and at $1.03 (78.6p) on a statutory basis.
At the current share price of 7,003p, this produces P/Es of 26.2 (AZN core), 33.4 (my core) and 89.1 (statutory). I believe my core number is a truer reflection of the underlying business performance than AZN’s core (and the statutory measure).
I’d want to see a P/E in the 20s on my measure before considering the stock a potential buy. This would require a lower share price or a further improvement in core EPS. For the moment, I continue to see AZN as a stock to avoid on valuation grounds.