Shares of Shire (LSE: SHP) jumped 4% higher on the release of its half-year results at noon today. The FTSE 100 pharma group reported a strong Q2 performance and upgraded its earnings guidance for the full year.
This is a stock I’ve had earmarked as seriously undervalued for some time. The price has retreated to 4,200p since the initial spike and I continue to view it as a dirt-cheap buy.
Strong long-term prospects
Shire catapulted itself into the position of world leader in rare diseases with its $32bn acquisition of US firm Baxalta in June last year. Today’s results show the merger is already bearing richer fruit than anticipated. Shire has over-delivered on first-year integration cost synergies, recognising $400m versus its $300m target and putting it ahead of schedule to deliver at least $700m by year three.
The company advised that the first-half performance was driven by significant contributions across its broad and diverse portfolio. And with the strength and scale of the enlarged group, I’m not surprised that Flemming Ornskov commented that the board is “very confident about Shire’s long-term prospects.”
The group’s rare disease and neuroscience businesses are both performing strongly and each has significant growth potential over the coming years. In fact, management is evaluating strategic options for the neuroscience franchise, including the potential for its independent public listing. It expects to complete this evaluation by year-end.
Generous valuation
Today’s updated guidance on full-year earnings increased the mid-range point for diluted earnings per American Depositary Share (ADS) to $15 from $14.90. Each ADS is equivalent to three ordinary shares, so we’re looking at ordinary earnings per share (EPS) of $5, or 379p at current exchange rates.
The price-to-earnings (P/E) ratio is 11.1. This looks far too generous to me for a company with Shire’s long-term growth credentials.
Weak sentiment
Also looking cheap, at a price of 1,560p, is advertising giant WPP (LSE: WPP). The shares are 18% below their all-time high of 1 March. The decline kicked off with an 8% drop when the company released its annual results on 3 March. Management said there had been a “relatively slow start to 2017” and guided on net sales growth of 2% for the full year when most City analysts had been anticipating 3%.
Sentiment was not subsequently helped by some brokers turning distinctly bearish on the stock, concerned by such things as competition from more nimble brands and the group’s ability to deliver its long-term target of 10%-15% annual EPS growth.
Bargain buy
However, while WPP is set to fall short of 2016’s headline earnings increase of 20%, a consensus EPS forecast of 126p still gives a very decent rise of 10% for 2017. Meanwhile, the decline in the share price since March has brought the P/E down to 12.4. Even allowing for lower earnings growth, this is cheap by WPP’s historical standards.
Furthermore, with the board having upped the dividend payout ratio to 50% of diluted EPS, a prospective yield of 4% is also considerably more generous than in the past. Therefore, this is another blue-chip stock I see as a bargain buy today.
