For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at pharmaceutical company AstraZeneca (LSE: AZN) (NYSE: AZN.US).
Track record
With the shares at 3495p, AstraZeneca’s market cap. is £43,871 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue ($m) | 31,601 | 32,804 | 33,269 | 33,591 | 27,973 |
| Net cash from operations ($m) | 8,742 | 11,739 | 10,680 | 7,821 | 6,948 |
| Adjusted earnings per share (cents) | 510 | 632 | 671 | 728 | 641 |
| Dividend per share (cents) | 205 | 230 | 255 | 280 | 280 |
1) Prospects
From the table, AstraZeneca’s declining financial performance is clear. Loss of exclusivity is cutting deep into revenue and profits, as once patent-protected best-selling products time-out, leaving the path clear for generic competition from other suppliers.
The recent third-quarter results continue the story. Adjusted results for the firm’s first nine months of the current year show a 7% constant-currency decline in revenue and a 23% drop in operating profit compared to the year-ago figures. Looking forward, The directors predict a mid-to-high single-digit decline in revenue for the full year.
In an effort to return to growth, the firm is focusing on productivity and efficiency, and investing in what it calls key growth platforms with the aim of developing its new-product pipeline. However, AstraZeneca investors should expect more short-to-medium-term pain, because a push for more R&D leads to a rise in core operating costs; the company expects full-year costs to be towards the upper end of its previous low-to-mid single-digit guidance.
AstraZeneca is struggling right now and a return to earnings growth relies on the development and successful market execution of new drugs. That’s something of a jam-tomorrow proposition although, given the firm’s long-term success in the field, there’s every reason to suppose that at least some new products will be successful.
2) Risks
The new-product pipeline has a lot of work to do. First, it must replenish declining sales and profits from AstraZeneca’s established business; then it must exceed previous sales in order to return the firm to growth.
That’s a big ask, and the risk is that the new-product pipeline may fail to achieve such expectations. In such a scenario AstraZeneca shareholders could end up holding a stagnating investment.
3) Valuation
A forward dividend yield running at about 5% for 2014 provides some comfort for optimistic AstraZeneca investors, although it’s uncertain when, if ever, that dividend payout will rise in a meaningful way. City analysts expect forward earnings to cover the dividend around 1.6 times.
The shares are currently trading at just over 12 times forward earnings. Those earnings seem set to decline by around 9% next year according to consensus predictions.
Conclusion
Right now AstraZeneca seems to attract mainly as a turnaround proposition. It’s conceivable that a return to growth could occur as new products take off.
