AstraZeneca’s (LSE: AZN) share price has jumped 38% from its 12 February 12-month low of £94.60. In the process, and to some media fanfare, it has become the first UK firm with a market capitalisation of £200bn+.
Many investors might see these numbers and think that there cannot be any value left in the shares. It is an understandable view, but in my experience as a former investment bank trader it is not necessarily true.
A rise in a company’s share price can simply result from it being fundamentally worth more than it was before. The market might also just be playing catch-up with the true value of the firm.
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Crucially, the stock might be worth even more than the new share price implies. This is the case with AstraZeneca, in my view.
How much value remains in the shares?
The pharmaceutical giant is still trading near the bottom of its peer group on several key measurements of stock valuation.
On the price-to-earnings ratio (P/E), it is second lowest at 40.7, above Merck at 21. The remainder of the competitor group comprises Novo Nordisk at 45.3, AbbVie at 64.6, and Eli Lilly at 113.1.
On the price-to-book ratio (P/B), the UK firm is joint lowest with Merck at 6.6, against the peer group’s average of 38.6.
I have not included its closest UK peer — GSK – in the group due to its much smaller size. But for comparison, it has a P/E of 16.1, a P/B of 4.5, and a P/S of 2.1.
In hard cash terms, a discounted cash flow analysis shows AstraZeneca is 48% undervalued at its current £130.53 share price.
Therefore, a fair value for the stock would be £251.02, although it could go lower or higher, of course.
Does the growth outlook support the valuation?
There are risks attached to all firms and AstraZeneca is no different. The main one I see is a failure in any of its key products.
This could be very expensive to rectify and might also prompt litigation for any ill effects on patient health. It could significantly damage the reputation of the firm.
That said, consensus analysts’ forecasts are that its earnings will grow 16.6% every year to the end of 2026. Earnings per share are expected to increase by 17.7% a year to that point. And return on equity is projected to be 29% by that time.
Earnings growth should power increases in a firm’s share price (and dividend) over time.
AstraZeneca’s H1 2024 results released on 25 July showed total revenue jumping 18% to $25.617bn from H1 2023. This was driven by 22% increases each in its cancer, CVRM (cardiovascular, renal and metabolism), and respiratory and immunology businesses.
Should I buy more?
I have gradually built my holding in the company from much lower levels, so I am happy with that position.
If I did not have this, I would have no qualms at all about buying the stock at the current price and would do so.
The shares still look heavily discounted on all the key stock measures that I think most accurately indicate true value.
