Shares in FTSE 100 pharma giant AstraZeneca (LSE: AZN) rose strongly in early trading today as market participants lapped up the company’s latest set of results. Personally, I won’t be joining the queue for the shares. Here’s why.
Returning to growth
Much of this morning’s reaction is probably due to the £73bn-cap’s very strong performance in the final three months of 2018. Over this period, product sales growth of 5% (or up 8% at constant exchange rate) was recorded. With sales hitting $5.77bn while markets were tanking across the world, AstraZeneca was clearly having a very good end to the year.
The numbers over 2018 as a whole were also pretty decent. Product sales rose 4% to a little over $21bn, supported by launches of new medicines, such as asthma treatment Fasenra where sales hit $297m in only its first full year of availablity. The popularity of cancer treatments Tagrisso and Lynparza also helped sales in AstraZeneca’s Oncology arm rise by 50%.
Another interesting snippet was the excellent form the business had shown in emerging markets. Sales in China, for example, jumped 28% over the year.
Unsurprisingly, management was clearly happy with these figures. Having declared that the company had “returned to growth,” CEO Pascal Soriot went on to state that its strategy and plans “remain unchanged, with sales growth and a focus on cost management anticipated to drive growing operating profit.” This all sounds very encouraging. So, are the shares still worth buying?
Looking dear
Taking into account today’s positive reaction, AstraZeneca’s stock has now climbed 12% in value over just a couple of weeks. I think there’s certainly a chance this positive momentum will continue beyond today.
In addition to the shares still trading below the highs reached back in November, the company’s defensive qualities arguably make it an ideal candidate for anxious investors, particularly with the US/China trade spat and Brexit still to be resolved.
Nevertheless, I’m starting to question the price being paid. Before this morning, AstraZeneca was already trading on 20 times forecast earnings for the new financial year. That feels rather dear, considering that you can buy sector peer GlaxoSmithKline for a little under 14 times earnings (even if the latter is following a very different trajectory under CEO Emma Walmsley).
But what about the company’s growth prospects? Well, a PEG ratio of below one suggests new investors in AstraZeneca would be getting plenty of potential for their cash. But this does rest on its ability to continue converting “one of the most exciting and productive pipelines in the industry” into actual medicines that sell. In a world where getting new drugs approved is a highly unpredictable, time-consuming and costly process, that’s easier said than done.
Thanks to its improving dividend cover, Glaxo also looks a better pick for income investors (something I’ve been doubtful on previously). A forecast 80p cash return this year equates to a yield of 5.1% at the current share price. AstraZeneca, in contrast, is set to yield 3.6%, with the cash payout slightly less covered by profits.
All told, I’m not sure I’d be tempted to buy stock in AstraZeneca at the current time, particularly if I’m ‘only’ looking to pick up dividends from my investments. In my opinion (and as covered here), there are far less risky ways of generating a second income stream from the market.
