The AstraZeneca (LSE: AZN) share price is a long way from being the hardest hit in this market crash. It ended yesterday at just over 7,000p. This is down 9% from its pre-crash level on 21 February, and 11% below its all-time high of 7,878p printed in January.
However, because big FTSE 100 pharma firms have defensive qualities, and healthcare is an industry with long-term structural growth drivers, we shouldn’t expect a company like AZN to suffer as badly as stocks in more cyclical or structurally-challenged sectors. Therefore, we should ask whether AZN’s current discount share price is a bargain for a stock of its quality.
Debased coinage
Fund manager Mark Slater — son of the late Jim Slater (author of best-selling investment book The Zulu Principle) — recently savaged companies’ “adjusted earnings per share” numbers as “a debased coinage.”
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Most companies headline such numbers in their results, and most analysts and investors use them to value the business. Almost invariably, these numbers portray a more flattering picture of the company’s performance than statutory EPS.
I’ve previously suggested AstraZeneca’s adjusted EPS — it calls it ‘core’ EPS — is one of the most egregious around. Don’t get me wrong, I think AZN is a quality business with a sound strategy, but, for a good while, I’ve felt the shares have been over-valued on a true view of underlying EPS.
However, after the recent fall in the share price, do I think the valuation is now attractive?
Smoke and mirrors revisited
I last wrote about AZN after its Q3 results last year. In that article, I showed how the company books one-time gains on disposals of non-core drugs as ‘core’ operating profit. I pointed out that such disposals had increased from £0 in 2014 to £1.9bn in 2018, with the latter representing a whopping 33% of AZN’s ‘core’ operating profit for the year.
On a positive note, I suggested it looked like certain disposals for 2019 would be lower, and that what I consider true core earnings would increase for the first time in five years. We now have AZN’s 2019 results, and the table below brings the position up to date.
|
Year |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Statutory operating profit (£bn) |
2.1 |
4.1 |
4.9 |
3.7 |
3.4 |
2.9 |
|
Adjustments (before gains on disposals) (£bn) |
4.8 |
1.8 |
0.5 |
1.7 |
0.4 |
2.3 |
|
My core operating profit (£bn) |
6.9 |
5.9 |
5.4 |
5.3 |
3.8 |
5.2 |
|
Gains on disposals (£bn) |
0.0 |
1.0 |
1.3 |
1.5 |
1.9 |
1.2 |
|
AZN core operating profit (£bn) |
6.9 |
6.9 |
6.7 |
6.8 |
5.7 |
6.4 |
|
Gains on disposals as % of AZN core operating profit |
0 |
14 |
19 |
22 |
33 |
19 |
As you can see, gains on disposals in 2019 were indeed lower, both in absolute terms (£1.2bn), and as a percentage of AZN’s core operating profit (19%). This is a move in the right direction, so how is the company’s price-to-earnings (P/E) valuation looking today?
Getting there
AZN’s EPS for 2019 came in at $3.50 (267.2p at current exchange rates) on the company’s own core measure. It worked out at $2.75 (209.9p) on my core measure, and at $1.03 (78.6p) on a statutory basis.
At the current share price of 7,003p, this produces P/Es of 26.2 (AZN core), 33.4 (my core) and 89.1 (statutory). I believe my core number is a truer reflection of the underlying business performance than AZN’s core (and the statutory measure).
I’d want to see a P/E in the 20s on my measure before considering the stock a potential buy. This would require a lower share price or a further improvement in core EPS. For the moment, I continue to see AZN as a stock to avoid on valuation grounds.
