1 defensive stock I’d buy alongside FTSE 100 peer Shire plc

The sell-off in defensive stocks is throwing up opportunities like Shire (LON SHP) and this share.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Analysts at Societe Generale went on record this week to say that the current valuation of defensive pharmaceutical operator Shire (LSE: SHP) “makes no sense.” They think the firm is selling too cheap and that we should buy the company’s shares.

The company seems to have fallen out of favour with investors as it digests its 2016 gargantuan acquisition of Baxalta, and the higher debt-load the firm took on seems to be giving investors indigestion when it comes to the shares. But I think something worth holding will emerge from the story and the value is becoming compelling. Growth could follow and the shares will likely turn back up. That’s why I was eagerly awaiting the full-year figures that hit the newswires this morning.

A compelling update

The update is encouraging. Underlying revenue is 32% higher than the previous year, underlying diluted earnings per share pushed up 16% and net cash from operations surged 60% higher. The directors demonstrated their optimism by pushing up the total dividend for 2017 by 15%.

Looking forward, Chief executive Flemming  Ornskov thinks the mid-term outlook is positive for growth because of the firm’s immunology franchise, multiple near-term launches, and participation in international markets. He says Shire aims to achieve a revenue target of $17bn to $18bn in 2020. However, during 2018, he expects underlying diluted earnings growth to come in below the rate of revenue growth during 2018, “mainly due to costs incurred from the start-up of our new US plasma manufacturing site, intensifying genericization, and lower royalties.”

A market-wide sell-off of defensive stocks

In addition to the big acquisition muddying the water, I think Shire might have been caught up the wider the sell-off of defensive shares we’ve seen over the past year or so. Today’s share price around 3,141p means you can pick up the stock on a forward price-to-earnings (P/E) rating for 2018 of just eight. I’m tempted to do just that and would consider the firm alongside fellow defensive play Pennon Group (LSE: PNN), the water and waste utility provider.

Pennon’s share price has been slipping, down 29% since June. The firm endured several years of falling earnings but that slide looks set to stop during the current year. In November, the firm reported half-year results showing revenue 5.6% higher than the year before and earnings per share up 7.2%. The directors marked the occasion by pushing up the interim dividend 7.9%.

Earnings look set to turn a corner after the company’s relentless focus on cost control and continuing investment in efficiency improvements. City analysts following the firm expect earnings to lift 13% for the trading year to March 2019 and 10% the year after that. Maybe the wider sell-off of defensive shares is affecting the share-price trend at the very point that Pennon is turning itself around. If so, I think the intersection of a rising growth trend and a falling share price is throwing up an opportunity for investors. At today’s share price around 627p, the forward P/E rating for next year is just below 12 and the forward dividend yield sits at 6.6%. I think that valuation is attractive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group and Shire. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »