On the face of it, 2015 was a poor year for investors in AstraZeneca (LSE: AZN). After all, the pharmaceutical company’s share price rose by just 1% and its bottom line is expected to have fallen by a further 3% as it comes to terms with the loss of patents on key blockbuster drugs.
But drilling deeper, 2015 was another hugely positive year for AstraZeneca, with its pipeline continuing to mount a strong turnaround as a result of further M&A activity. This puts it on a strong growth trajectory over the medium-to-long term. And while 2016 is set to be another year of earnings decline, 2017 and beyond could see the company’s bottom line begin to move upwards as AstraZeneca seeks to double its revenue by 2023. With the company’s shares trading on a price-to-earnings (P/E) ratio of just 16.2, they appear to offer significant upward rerating potential over the medium term.
In addition, AstraZeneca currently yields 4.1%. When this is added to its 1% capital gain from last year, its total return for 2015 was highly impressive when the FTSE 100 could manage a total return of minus 1% last year. Looking ahead, dividends remain well-covered by profit at 1.4 times and with the aforementioned improvements in the company’s pipeline, brisk dividend growth over the long run appears to be relatively likely.
Robust health
Also posting a negligible capital gain in 2015 was Smith & Nephew (LSE: SN). Like AstraZeneca, its shares increased in price by just 1% last year, although this was still ahead of the FTSE 100’s fall. This provides evidence of the defensive appeal of Smith & Nephew which, unlike pharmaceutical companies such as AstraZeneca, benefits from a relatively consistent and robust revenue stream.
With Smith & Nephew expected to increase its bottom line by 10% in 2016, investor sentiment in the stock could improve and push its share price higher. Certainly, its P/E ratio of 20 lacks value on both a relative and standalone basis. But with an excellent track record of growth and a commanding position in the wound management and orthopaedic spaces, it appears to be a sound buy for 2016 and beyond. That’s especially the case since the outlook for the wider market remains relatively uncertain, with investors likely to prioritise defensive growth stocks in the coming months.
Meanwhile, Reckitt Benckiser spin-off Indivior (LSE: INDV) saw its share price soar by 26% last year as the company raised guidance in its third quarter results. But since then, the FDA has declined approval for the company’s intranasal naloxone spray for the emergency treatment of opioid overdose. Clearly, this is a disappointment. And with the impact of generic competition continuing to hurt Indivior’s earnings outlook, its shares could continue to slide in the short run as they have done in recent months.
In fact, Indivior’s share price is down by 19% in the last three months and with its bottom line expected to decline by 29% in 2016, its valuation could come under further pressure. That said, with a forward P/E ratio of just 12.6, Indivior appears to be relatively cheap. However, the likes of AstraZeneca and Smith & Nephew offer improved outlooks and with superior risk/reward ratios, seem to be preferable buys at the present time.
