After I spent some time last week telling you why GlaxoSmithKline is my pick of the FTSE’s pharmaceuticals sector for novices, you might expect me to turn my nose up at AstraZeneca (LSE: AZN) (NYSE: AZN) today.
But no, I’m going to do the opposite, and tell you why I like AstraZeneca as well.
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AstraZeneca may only be a little over half the size of GlaxoSmithKline in terms of market capitalisation (£40bn compared to £77bn), and only enjoyed around 65% of its 2012 annual turnover at £17bn. But it’s still the 14th biggest company listed in London and still easily enjoys the “big pharma” clout when a bit of financial muscle is needed — for acquisitions, to get through tough patches and work towards the long term, and such things.
Over the past couple of years, I do think AstraZeneca has been slower than some of the competition to embrace the moves towards biotechnology and to decide what its long-term strategy is to be, and that’s part of the reason I plumped for Glaxo for the Fool’s Beginners’ Portfolio in June last year.
But since then I’ve been impressed by new chief executive Pascal Soriot, who took the helm in October 2012 and immediately set about focusing on the company’s core strengths. As recently as 1 August this year, in the firm’s first-half results release, Mr Soriot said: “We have made real progress in the second quarter against our strategic priorities […]. We continue to invest in distinctive science, our pipeline projects, products and key markets and our five key growth platforms delivered a double-digit increase in revenue contribution.“
I don’t want to get too concerned about short-term results and valuations, because that’s not what this series of articles is about, and at the halfway stage AstraZeneca’s profit figures were down as expected — whether you think a share on a forward P/E of 10 and offering a likely dividend of around 5.5% is cheap at the moment is up to you.
But what I think recent developments do show is that a company like AstraZeneca has the ability to respond in a careful and measured way to changes, like losses of patent protection and increased competition from generic drugs, without any need for panic.
Three years of falling earnings, which is what we should have by the time 2014 is out, could well lead to a share price slump for smaller companies in this kind of business — and in some other sectors, the sound of the crash would most likely be deafening.
Minimise the downside
But since the end of 2011, the last year AstraZeneca reported a rise in EPS, we’ve actually seen the shares gain 8% to today’s 3,214p. Sure, that’s not great, but it does suggest the downside is limited even during relatively tough times — and shareholders did get an extra 6% in dividends at the end of 2012.
We’re starting to see some positive-looking acquisitions and collaborations, too, so a relatively weak performance on that score over the short term is no great problem in the long term, either.
And I think these points help emphasis something that novices are wont to overlook — when you’re starting out, you should first be looking to reduce your risk of losses. And to do that, you’ll learn a lot more about a company’s risk when it’s going through a weaker spell than when it’s flying high.
And to me, AstraZeneca is looking good.