At Wednesday’s close, AstraZeneca (LSE: AZN) shares were up 29% in 12 months. And over the past five years, they’ve more than doubled in price.
After full-year results were released Thursday, the share price climb resumed. At the time of writing, it’s up another 5% on the day.
The pharmaceuticals giant reported another double-digit rise in revenue, by 19% (at actual exchange rates) to $44.4bn. The fourth quarter did see a 7% decline, though. Covid vaccine sales are falling sharply.
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Excluding Covid medicines, AstraZeneca’s guidance for 2023 suggests another double-digit percentage rise in revenue. Including Covid however, it brings the expectation down to “a low-to-mid single-digit percentage” increase.
Valuation
This gives me mixed feelings. Covid sales pushed the company into the spotlight in 2020 and beyond. And it’s surely what drove the stock’s price-to-earnings (P/E) ratio to over 100 at one stage. That, I reckon, was madness.
Working out the current P/E based on the latest results is not simple. Reported earnings per share (EPS) come in at $2.12. On today’s share price, that gives a lofty P/E of a 64.
But on what the company calls core EPS of $6.66, that multiple would drop as low as 21. Core EPS is a measure that excludes all sorts of things, essentially one-offs. With a company that typically shows big one-offs every year, it’s hard to know which figure to use.
Post-Covid
Investors will have to decide how to judge the stock valuation themselves. But just as a comparison, GSK is on a trailing P/E of 14. And that’s 50% lower than even the core-based valuation for AstraZeneca. GSK, of course, didn’t have its name in all the Covid headlines of the past few years.
From that non-Covid guidance, I also take encouragement. If the company can generate double-digit revenue growth from the rest of its portfolio, that’s impressive. I’d see it as evidence of good long-term growth potential.
Chief executive Pascal Soriot said: “Our R&D success and revenue increase in 2022 demonstrate that we are on track to deliver industry-leading revenue growth through 2025 and beyond, and have set AstraZeneca on a path to deliver at least fifteen new medicines before the end of the decade.”
Verdict
I really do admire the way Soriot has led AstraZeneca. From the company’s struggles with blockbuster patent expiries, we’ve seen its drug development pipeline rebuilt very successfully.
My reservations though, are twofold. In the shorter term, I fear the declining Covid factor could push investors away. And that could send the share price into reverse.
In the longer term, the high P/E valuation worries me. The company’s core adjustments do lower it significantly. But I just don’t know how much of that represents fair long-term valuation.
I don’t see the need to take on the valuation risk right now, especially as the FTSE 100 is packed with shares on valuations that I think are crazily low. Still, I do enjoy a successful turnaround story.
