AstraZeneca (LSE: AZN) (NYSE: AZN.US) shares remain 20% higher than they were at the start of the year, despite having fallen by 10% since the firms board rejected a 55 per share takeover bid from US giant Pfizer.
Now that AstraZenecas valuation has cooled off somewhat, are the shares a buy again, or are they still too pricey?
Ive taken a closer look at AstraZenecas performance and valuation to find out more.
Valuation
Lets start with the basics: how is AstraZeneca valued against its past earnings, and the markets expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
10.6 |
|
2-year average forecast P/E |
16.5 |
Source: Company reports, consensus forecasts
The picture painted here is clear: AstraZenecas near-term earnings are expected to fall substantially below the firms historical average, but this is not expected to be a permanent decline.
Investors are willing to credit AstraZeneca for future growth, and are also pricing in the possibility of a second bid attempt by Pfizer, which some including star fund manager Neil Woodford, believe is likely.
What about the fundamentals?
Buying into a company whose share price is already priced for a bid is a risky strategy.
After all, AstraZenecas share price has fallen by 6% since 23 September, when changes to US tax rules made a bid less financially attractive for US companies. Should Pfizer categorically rule out a second bid, Id expect AstraZeneca shares to take another tumble, back towards the 38 level they traded at before Pfizers bid interest became public.
Given all of this, do AstraZenecas fundamentals support a buy at todays price?
|
Metric |
5-year compound average growth rate |
|
Sales |
-4.8% |
|
Core operating profit |
-9.2% |
|
Core earnings per share |
-4.4% |
|
Dividend |
+4.5% |
Source: Company reports
For me, AstraZenecas falling sales and profits over the last five years would normally be a warning flag buying into a firm with a high forecast P/E and falling sales isnt usually a great idea.
However, AstraZeneca remains a world leader in certain areas and is a very large and still profitable company, offering a 4% yield. I believe that the firms turnaround will ultimately be successful, and will generate substantial value for shareholders over the next five to ten years.
Buy AstraZeneca?
In the short term, however, I plan to wait and see if AstraZeneca gets any cheaper: this might mean missing out if Pfizer does make a second bid, but as a long-term income investor, Im more interested in locking in a strong long-term income when I trade, rather than speculating on one-off takeover gains.
I rate AstraZeneca as a hold, as for me it is not quite cheap enough to discount the expectation of further declines in sales and profits.
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Roland Head 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.
