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Why AstraZeneca plc Should Be A Winner Next Year

In my stroll around some of our top FTSE 100 shares with a view to their prospects for 2014, today I’ve wandered over to AstraZeneca (LSE: AZN) (NYSE: AZN.US).

What does the drugs giant’s recent record look like? Here’s the past five years together with forecasts for this year and next:

Dec Pre-tax EPS Change Dividend Change Yield Cover
2008 $8,681m 510c

+16%

205c   4.4% 2.5x
2009 $10,807m 632c +24% 230c +12% 4.8% 2.8x
2010 $10,977m 671c +6% 255c +11% 5.3% 2.6x
2011 $12,367m 728c +8% 280c +9.8% 5.7% 2.6x
2012 $7,718m 641c -12% 280c 0% 5.8% 2.3x
2013(f) $6,296m 501c -22% 284c +1.4% 4.8% 1.8x
2014(f) $5,736m 456c -9% 286c +0.7% 4.8%

1.6x

The obvious thing to see there is a reversal in the earnings trend in 2012. From steady (but slowing) rises in earnings per share, AstraZeneca suddenly switched to a significant drop of 12% — and we’re expecting an even bigger fall this year of 22%, with 2014 only slowing the slide to a further 9%. What gives?

Patent cliff

It was caused by the long-expected “patent cliff” as patents for a number of blockbuster drugs expired and generic alternatives have been becoming increasingly available, so there really was no surprise.

But with the fall in earnings being predictable, AstraZeneca has been able to maintain its dividend. Its cover leading up to the drop-off year was maintained at a high level, and even after three years of expected earnings falls, the 2014 payment should still be adequately covered.

But what is the firm doing to reverse the decline in earnings?

New broom

New chief executive Pascal Soriot, who took the helm in October 2012, quickly asserted his authority. And in March 2013 AstraZeneca outlined its plan for a return to growth.

It includes “dramatically simplifying” the business to focus on core strengths, and keeping a steady flow of “specialty care products” heading out the door. But the core priority is to get that drugs pipeline back into top speed, with the company saying that its Phase II pipeline has the potential to double Phase III volumes by 2016. Getting the most from its acquisitions is also a key factor — in recent years AstraZeneca has been weak on the acquisition front when compared to, say, rival GlaxoSmithKline.

How’s it going? When Q3 results arrived at the end of October, Mr Soriot told us that he was “pleased with the progress we are making, particularly on the pipeline“, telling us the firm was investing in the pipeline as promised, and in its key growth areas.

And the latest we’ve heard, on 19 December, was that AstraZeneca has agreed to buy out Bristol-Myers-Squibb‘s share of its diabetes alliance — and that sounds like a firming up of a core strength to me.

Looking good?

I’ve always been a big supporter of strong management, and with Mr Soriot in charge I think we have that at AstraZeneca now. And I think the corner has been turned — I’ll be disappointed if we don’t see AstraZeneca achieving that return to growth by 2015-2016.

With the shares on a forward P/E of only 13 based on 2014 forecasts, I can see them doing well over the next year — especially with those above-average dividends of nearly 5%.

Verdict: Heading back to health.

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> Alan does not own shares in Aviva or RSA. The Motley Fool has recommended shares in GlaxoSmithKline.