Just one year ago, AstraZenecas (LSE: AZN) (NYSE: AZN.US) share price was generally tracking the index and sentiment in the stock remained rather subdued. After all, the pharmaceutical major was still in the relatively early stages of its fight back to overcome a severe patent cliff and, although it was making progress, there was still a very long way to go.
However, since then, AstraZeneca has seen its share price rise by a whopping 41% (versus a fall of 1% for the FTSE 100), with sentiment in the companys shares improving significantly and an improved pipeline also contributing to its success. Furthermore, bid approaches from Pfizer have also supported the share price.
Looking ahead, there could be much more to come from AstraZeneca and it could beat the FTSE 100 in 2015. Heres how.
Bid Potential
Despite US regulators taking steps to close the so-called tax inversion loophole that made it advantageous for US firms to register abroad for tax purposes, further bid approaches for AstraZeneca could be on the cards. Indeed, Pfizers CEO, Ian Read, recently refused to rule out a further bid for AstraZeneca, although clearly this would be based on the potential for synergies and increased profitability as opposed to tax reasons.
Indeed, pharmaceutical majors such as Pfizer are struggling to grow their bottom lines and, with plenty of financial firepower and a low interest rate, acquisitions are an obvious answer. Clearly, any further bids for AstraZeneca, from Pfizer or from another firm, would be highly beneficial to AstraZenecas share price. With Pfizer able to make another bid for AstraZeneca from the end of November onwards, such a bid could come along a little sooner than is currently being priced in.
M&A Activity
Although AstraZeneca is still in the midst of overcoming its patent cliff, with profitability set to fall further both in the current year and next year, it is making excellent progress. Acquisitions such as the Bristol-Myers Squibb share of the diabetes joint venture could prove to be highly beneficial to the companys earnings, while relatively low financial gearing and strong cash flow mean that further debt can be accommodated on to AstraZenecas balance sheet, thereby allowing for more takeovers in future. The result of more takeovers could be more profit and a higher share price for AstraZeneca.
Improving Results
As was reported in its recent results, a lack of generic competition for one of its heartburn drugs, Nexium, means that sales and profit forecasts for the current year have been upgraded. This is not the first time this year that guidance has been moved upwards and, as a result, sentiment in the companys shares is clearly on the up.
Despite this, AstraZeneca still trades on a relatively attractive valuation. For example, it has a price to earnings (P/E) ratio of 16.9 which, for a pharmaceutical stock, is relatively attractive. Indeed, Shires P/E ratio was in excess of 20 when AbbVie made its bid approach. Furthermore, AstraZeneca remains an enticing income play, with a yield of 3.7% being above the FTSE 100s yield of 3.4% and having the potential to grow as the company continues to overcome its patent cliff.
So, even though shares in AstraZeneca have had a fantastic year, they could beat the FTSE 100 in 2015 as well as in 2014.
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Peter Stephens owns shares of AstraZeneca. 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.
