AstraZeneca’s (LSE: AZN) share price remains significantly down from its 3 September 12-month traded high of £133.38.
Such a drop could signal that the pharmaceuticals giant is fundamentally worth less than it was before.
Or it could flag a major bargain to be had.
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To find out which it is, I took a close look at the core business and its key valuations.
How does the business look?
Weighing on the share price recently has been the ongoing investigation into the firm’s Chinese operation. These include allegations of medical insurance fraud, illegal drug imports and personal information breaches. This remains a principal risk for the company, in my view.
However, its full-year 2024 results released on 6 February showed total revenue up 21% year on year to $54.073bn (£43.59bn). Its core earnings per share (EPS) were up 19% to $8.21.
The firm also delivered nine positive high-value Phase III studies in the year. This is the final stage before a treatment can gain regulatory approval to go to market.
AstraZeneca now forecasts total revenue to increase by a high single-digit percentage in 2025. It further projects that core EPS will rise by a low-double-digit percentage during that time.
Overall, it said that 2024 “marks the beginning of an unprecedented, catalyst-rich period for our company”. It added that it is “an important step on our Ambition 2030 journey to deliver $80bn total revenue by the end of the decade”.
Following these numbers, analysts forecast that its earnings will increase 16.97% a year to the end of 2027.
And it is earnings growth that ultimately powers a firm’s share price (and dividend) higher.
So, are the shares undervalued now?
I compare a stock’s key valuations with its peers as the first part of assessing the fairness of its current share price.
On the price-to-earnings ratio (P/E), AstraZeneca is second lowest at 31.7, above Novo Nordisk at 27.6. The remainder of the peer group comprises Pfizer at 32.4, Eli Lilly at 74.7, and AbbVie at 78.7.
So, AstraZeneca looks very cheap on this measure.
The same is true of its price-to-book ratio of 5.5 against a competitor average of 34. And it is also the case for its 4.1 price-to-sales ratio compared to a 10.5 peer average.
The second part of my share price assessment looks at where a stock should be, based on future cash flow forecasts for a firm.
The resultant discounted cash flow analysis using other analysts’ figures and my own shows AstraZeneca shares are 47% undervalued.
Therefore, the fair value of the stock is technically £219.81.
It may move lower or higher than this due to the vagaries of the market, of course. But the three key ratio undervaluations and the huge discount to the DCF-derived fair value confirm to me how cheap the stock looks now.
Will I buy more of the shares?
Any significant dip in AstraZeneca’s share price is too tempting for me to miss.
The company has ambitious growth targets, which I think it will hit. As a result, its earnings are likely to grow at least in line with analysts’ forecasts, in my view.
This in turn should drive its share price (and dividend) higher over time.
Consequently, I will be buying more of the stock very soon.
