Big cap FTSE 100 shares are ever popular, but I sometimes wonder whether looking down the food chain, perhaps at companies in the FTSE 250 index, could produce an investment idea that’s equally solid, but with potentially more exciting forward prospects.
To test the theory, I’m contrasting AstraZeneca (LSE: AZN) (NYSE: AZN.US) with its far smaller rival Hikma Pharmaceuticals (LSE: HIK). AstraZeneca’s £48,420 million market capitalisation makes it 20 times the size of Hikma Pharmaceuticals, with its £2,407 million valuation. That David-and-Goliath situation underlines the success that AstraZeneca has enjoyed and suggests that Hikma Pharmaceuticals has plenty of room to grow.
The business models
The companies have different business models. AstraZeneca spends millions on research & development to generate a pipeline of patent-protected drugs, which it then markets exclusively for a premium sales price. In recent years, however that strategy has been problematic — many best-selling products have timed-out on patent protection, losing their ‘exclusivity’ and allowing generic competition to enter the market, which has stymied earnings’ growth.
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Hikma Pharmaceuticals is one of the companies that compete by producing generic drugs once a product’s exclusivity has lapsed. The firm also deals with in-licensed pharmaceutical products, providing the marketing and distribution expertise and resources for products developed by other firms.
Both AstraZeneca and Hikma Pharmaceuticals count their product offerings in the hundreds. AstraZeneca’s biggest market is the US with around 38% of sales, followed by Western Europe with 23%, Emerging Markets with 21% and 18% from the rest of the world. Hikma Pharmaceuticals sells 56% of its goods to the Middle East and North Africa, 36% to the US, and 8% to Europe and the rest of the world.
Growth records
The two strategies have produced different financial outcomes. AstraZeneca has achieved a compound annual growth rate (CAGR) of 3.5% for earnings per share over the last five years. That’s supported a CAGR of 6.4% for the dividend. Hikma Pharmaceuticals has done better with a CAGR of 11.3% for earnings supporting 16.4% annualised growth in the dividend over the same five-year period.
City analysts expect AstraZeneca’s earnings to fall by 24% for 2013, then down a further 10% in 2014 and come in flat for 2015. That contrasts with Hikma Pharmaceuticals, which they expect to achieve earnings growth of 80% for 2013, then down 13% for 2014, but up 12% in 2015.
Hikma pharmaceuticals is the clear winner on forward earnings’ growth prospects.
Valuations
At today’s 3,906p share price, AstraZeneca’s forward P/E ratio is running at about 15 for 2015. For that, investors tap into a 4.4% forward dividend yield with the payout covered about 1.5 times by forward earnings.
Meanwhile, at a share price of 1213p, Hikma Pharmaceutical’s P/E ratio is at 18.5 for 2015. Earnings cover the forward dividend 3.5 times and the forward yield is 1.5%.
What now?
AstraZeneca looks good for its dividend but, given its lacklustre growth outlook, I find Hikma Pharmaceuticals valuation and prospects more attractive and I think the firm is a good candidate for further research with a view to buying on share-price dips.
