Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, Im going to tell you the price I think would put AstraZeneca (LSE: AZN) (NYSE: AZN.US) in the bargain basement.
Changing perceptions
The markets perception of the value of a company can change quite dramatically in a relatively short space of time. Two years ago, when I was writing that AstraZeneca could handsomely reward patient investors, the share price was under 30, earnings were forecast to fall 19% and the forward P/E was 7.9. Today, the shares are trading at over 47, earnings are forecast to fall 13% this year and 6% next, and the forward P/E is 18.2!
The market really woke up to the value in AstraZeneca last spring. US pharma giant Pfizer made an indicative offer of 50 a share for AstraZeneca a hefty premium to the 38 at which the market had been valuing the UK company immediately before rumours of the bid emerged. AstraZeneca rejected the offer and also turned down Pfizers subsequent raised offer of 55 a share.
At what price a bargain?
Clearly, with AstraZenecas shares currently trading at over 47 and the P/E at more than 18, the market is pricing in some hope that Pfizer will come back with another offer (or that a bid will come in from another company). Buying shares at inflated prices, purely on the basis of a potential takeover, can often leave investors with egg on their faces, if no deal materialises.
So, what price would put AstraZeneca in the bargain basement? Well, the company has made great progress since Pascal Soriot was installed as chief executive in 2012. I dont expect to see the shares at under 30 and the P/E at less than 8 again!
Im going to take the c. 38 at which AstraZenecas shares were trading before Pfizer came on the scene as my starting point. At that time the forward P/E was in the 15-16 area. Today, if the shares were at 38, the forward P/E would be 14.7 yet there has been further good newsflow in the meantime.
As it happens, my bargain-buy rationale for AstraZenecas FTSE peer GlaxoSmithKline currently also equates to a P/E of 14.7. Thats a premium to the FTSE 100 long-term average of 14, but a rating Im comfortable classing as a bargain for quality companies in other high-margin sectors, such as antithesis-of-healthcare British American Tobacco.
The final question is whether to allow anything at all for AstraZenecas attractiveness as a bid target. Im going to allow a little bit, and say AstraZeneca would be in the bargain basement at a price of up to 40.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
