Shire (LSE: SHP) is bouncing back from its recent lows, but some risk still remains for its shareholders. The same holds true for AstraZeneca (LSE: AZN), yet I do not think that downside risk is any greater forHikma (LSE: HIK) than for its two larger rivals.
Its shares have traded in the 3,448p5,870p range over the last twelve months, and currently change hands at around 4,800p . Shires performance since early August has been very poor but was not unexpected.As I argued last month, itsstock was astraightforward investment until 4 August, but has since become a less obvious pick due to the Shaxalta risk the risk that Shires hostile approach for US biotech rivalBaxalta will cost it north of $50 a share.
Theres been talk thatBaxalta may pursue acquisitions to prevent a takeover from Shire, so the biggest threat to value is that uncertainty may well persist into 2016, with Shire looking at similarly expensive targets if it fails to acquire Baxalta.Regardless of the outcome, Shire remains a strong long-term buy at this level based on fundamentals, trading multiples, geographical mix and several other factors but if you are after short-term gains, its possible that your Christmas shopping may have to be financed by alternative sources!
Hikma & Astra
Hikmas strength has not surprised me at all over the last few weeks of trade. Indeed, its corporate strategy makes a lot of sense, while its capital allocation strategy where it deploys cash, how much cash deployment costs to the firm, and what kind of capital is being deployed is superb.Its equity value is up 25% this year spurred by deal-making, and its valuation has been resilient all the way through the summer. At 2,490p, its share price is only slightly lower than a 52-week high of 2,617p, but is much higher than a one-year low of 1,580p.
Some pundits argue that Hikma is expensive based on its trading multiples, fundamentals and a few other elements, but I argue that you should gladly hold its stock as part of a diversified portfolio even if it were totrade north of 30x its forward earnings. Its balance sheet is sound, its core margins are rich and theres plenty of growth kicking around far from being a potential sell, this is a compelling buy in my view. End of story.
Over the last month, its performance on the stock exchange has been matched by that of Astra (+12%), but Id not hold Astra stock instead. Its priced at 30x forward earnings, which is a very high valuation for a defensive business that offers little growth and whose pipeline of drugs is not particularly attractive.
I am bearish on Astra also because if I were to single outa truly appealing, maturepharmaceutical business whose stock trades ata significant discountto fair value right now, another obvious name would spring to mind.
And that name is included ina FREE and exclusive research that has been put together by our analysts!
This company is set to benefit from demographic trends in developed economies as well as the rising wealth and demand for modern healthcare in emerging markets. It could also receive a short-term boost from targeted divestments, I’d argue.
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