Is It Time To Dump AstraZeneca plc And Buy Hikma Pharmaceuticals Plc And Shire PLC?

Are Shire PLC (LON: SHP) and Hikma Pharmaceuticals Plc (LON: HIK) better options than AstraZeneca plc (LON: AZN)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While taking a long term view can lead to great success when it comes to investing, there comes a point at which exiting lacklustre investments may be a sound move. That’s especially the case if the outlook for the business is rather downbeat and there are better options to generate capital gains available elsewhere.

Although many investors may feel that AstraZeneca (LSE: AZN) falls into that category owing to its declining profitability, the company’s future remains very bright. Certainly, its bottom line has slumped by over 40% in the last four years and is expected to decline by a further 7% this year, but it has the potential to deliver significantly improved performance in the coming years.

That’s mostly because of its current strategy in attempting to overcome the patent cliff that’s causing the loss of vast swathes of sales of its key, blockbuster drugs. AstraZeneca has engaged in M&A activity and has the cash flow and balance sheet to continue to do so in the coming years. This should provide it with a growth in sales and profitability, with a flatline in its bottom line for next year highlighting the improvements being made.

While the process of turning AstraZeneca around is a rather gradual one, it offers excellent income prospects in the meantime. For example, it yields 4.9% and with shareholder payouts being covered 1.4 times by profit, it seems to have sufficient headroom to raise dividends in the coming years.

Better Options Elsewhere?

Of course, there are other options in the healthcare sector that also hold considerable appeal for long-term investors. For example Shire (LSE: SHP) is expected to increase its bottom line by 12% in the current year and by a further 16% next year. And while its deal to merge with Baxalta provides a degree of uncertainty regarding its future performance, its current margin of safety appears to be sufficiently wide to merit investment. For example, Shire trades on a P/E ratio of 12.3, which indicates that an upward rerating is on the cards.

Similarly, Hikma Pharmaceuticals (LSE: HIK) is expected to post excellent profit growth in 2017 following what is expected to be a rather disappointing 2016. In the current year its bottom line is due to fall by 9%. But with growth of 31% pencilled-in for next year, it seems likely that investor sentiment will improve following a tough 12-month period that has seen its share price fall by 16%. That’s especially the case since Hikma has a price-to-earnings growth (PEG) ratio of just 0.5, which indicates that it offers upbeat growth prospects at a very reasonable price.

While Shire and Hikma have better growth prospects for the next couple of years, AstraZeneca continues to offer stunning long-term turnaround potential. And with it having a yield of 4.9%, versus 0.6% for Shire and 1% for Hikma, it remains a superior income play that could become a bid target if its share price continues to offer lacklustre performance over the medium term. As such, and while Shire and Hikma are appealing, AstraZeneca seems to be the preferred option of the three healthcare plays for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

£5,000 of 9.2%-yielding Legal & General shares could make me £599 a month in passive income over time!

Legal and General shares remain a top passive income stock in my core portfolio holdings, with a 9.2% yield and…

Read more »

Investing Articles

With a 10.4% yield, P/E ratio of 9.9, and a P/B of 0.37, is this FTSE 100 stock a no-brainer buy for me?

Using a range of popular valuation measures, this FTSE 100 stock appears to offer tremendous value for money. So is…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Down nearly 18% from its 52-week high, is the Lloyds share price now a screaming buy for me?

In recent weeks, the Lloyds share price has under-performed the wider market. Could this be the buying opportunity that I’m…

Read more »

Investing Articles

As BAE Systems’ share price drops 14% should I buy more?

FTSE 100 defence giant BAE Systems recently reiterated strong growth guidance, leaving its share price looking significantly undervalued to me.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

After an 18% jump on its 2024 results, is it too late for me to consider buying this FTSE 100 hidden gem?

This FTSE 100 technology firm unveiled very strong 2024 results recently and a big share buyback, but is it too…

Read more »

Investing Articles

£5,000 invested in Rolls-Royce shares in 2023 would have made this much by now

Rolls-Royce shares have been one of the best-performing UK FTSE 100 investments over the last two years. But how much…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

£5,000 invested in Lloyds shares in 2023 would be worth this much now

Lloyds shares and other banking stocks have thrived in 2024, but has it been a good investment for shareholders who…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Why are investors blowing a raspberry at this FTSE 250 stock?

After a successful IPO, the share price of this FTSE 250 stock's fallen. Our writer looks at the reasons and…

Read more »