Many investors got excited recently on the back of a Bloomberg report of a potential merger between AstraZeneca (LSE:AZN) and Gilead Sciences, a large American biopharmaceutical company. Such a deal would have involved close co-operation in researching and developing a coronavirus vaccine.
But this excitement didn’t last long as AstraZeneca ruled out talks about such a deal. It was probably a smart decision to do so since the pharmaceutical giant is best known for its excellent cancer drug pipeline. So focusing on its core competency should lead to better profits. Even though investing heavily in a Covid-19 vaccine might have given it a newsworthy boost, developing and testing one is a very long and costly process with no certainty of success.
I’ve read plenty of news in the press about small healthcare companies trying to develop Covid-19 vaccines. However, they all turned out to be rumours in the end. The point I’m making is that no one can guarantee that a particular company or a group of companies will develop an effective one. Even if it does happen, testing, marketing and launching one would take time and resources. So it would take a while for any vaccine to start generating positive cash flows.
We all know that even a rumour of a Covid-19 vaccine developed by a particular company makes that company’s shares skyrocket, thus making it a less attractive buy for a value investor. So in the end, it might be good news that a merger between Gilead and AstraZeneca was a non-starter.
But is the latter a good buy or not as it stands? Let’s look at its fundamentals.
The numbers
Some may be flocking to AZN shares but hedge funds aren’t particularly enthusiastic about the firm. The company isn’t in the top 30 positions in most large funds’ portfolios. And the hedgies have very good reasons to avoid being too positive on these shares, I feel.
I totally agree with my colleague Kirsteen Mackay that the company looks overvalued. Apart from a very high price-to-earnings (P/E) ratio of more than 100, its revenue and earnings growth is unimpressive to me. A much lower P/E ratio of 20 would be about average, but even this wouldn’t make a company’s stock a bargain. And a ratio over and above that really has to be justified. A company with such a big multiplier as AZN has to have truly impressive earnings and revenue growth.
AstraZeneca’s earnings per share (EPS) hardly increased between 2018 and 2019. In 2018, EPS had been $3.46, but in 2019 they rose marginally to $3.50 per share. Revenue growth was better and totalled 15% between 2018 and 2019, but without profits growth to match, that’s not exactly exciting.
AstraZeneca does, however, pay dividends. Yet the dividend yield is below 3% and lower than FTSE 100’s average of more than 4%.
This is what I’d do now
Even though AstraZeneca is a market leader, I’d probably avoid investing in a company with numbers like it has. The firm’s shares are really expensive and I feel this price can’t be justified. I’d look elsewhere.
