The AstraZeneca (LSE: AZN) share price has been making new all-time highs in recent weeks. It’s up 21% year to date, compared with a 9% decline for the FTSE 100. And over the past five years it’s climbed 87% versus a 5% gain for the index. Do I think it can continue to smash the market?
Historically low base
The company released its Q3 results earlier this month, and chief executive Pascal Soriot told investors: “Today marks an important day for the future of AstraZeneca, with the performance in the quarter and year to date showing what we expect will be the start of a period of sustained growth for years to come.”
This growth would start from a historically low base. Over the last 12 months, the company generated $399m net cash from operations on revenue of $21.5bn. There was a time when it was generating in excess of $10bn cash a year. This last occurred in 2010 when it posted $10.7bn (on revenue of $33.3bn). After investing activities and dividends, it still had more than $1bn left to add to its cash pile. Net cash at the year-end stood at $3.7bn.
Roll on to 2013 when new boss Soriot delivered his first annual results, and the picture was already looking less rosy. Revenue had declined to $25.7bn, net cash from operations to $7.4bn and year-end net cash was just £39m. The table below shows some key numbers that illustrate the business’s continuing decline to where it is today.
| 2014 | 2015 | 2016 | 2017 | 2018 (ytd) | Total | |
| Revenue ($bn) | 26.1 | 24.7 | 23.0 | 22.5 | 15.7 | 112.0 |
| Net cash inflow from operating activities ($bn) | 7.1 | 3.3 | 4.1 | 3.6 | 0.4 | 18.5 |
| Net cash inflow/(outflow) from investing activities | (7.0) | (4.2) | (4.0) | (2.3) | 0.0 | (17.5) |
| Dividends paid (£bn) | (3.5) | (3.5) | (3.6) | (3.5) | (3.5) | (17.6) |
As you can see, revenue has fallen every year and net cash generated from operating activities has been a far cry from its heyday. Almost all the total of $18.5bn generated in the period has been ploughed back into investing activities ($17.5bn). This means that the business itself has supported just $1bn of the total of $17.6bn paid out in dividends. The company has simply been borrowing money and handing it over to shareholders. It’s gone from a net cash position of £39m at the start of 2014 to a net debt position of $16.2bn today.
Premium valuation
The impact of patent expiries on some of AstraZeneca’s key blockbuster drugs is now bottoming out. With new drugs coming through, the company is in a position to begin growing its top line again. However, it’s going to be quite some years before we see a return to anything like the aforementioned $33.3bn revenue and $10.7bn net cash generation we saw in 2010. As such, and with the company also having moved from a net cash position of $3.7bn in 2010 to that net debt of $16.2bn today, it seems strange to me that the shares have risen quite as far as they have. Indeed, the current price of 6,204p is more than double what it was when the company posted those impressive 2010 results.
The valuation today is 23.9 times current-year forecast earnings, falling to a still premium 21.6 next year on forecasts of 10.3% earnings growth. The price-to-earnings growth (PEG) ratio of 2.1 is well above the PEG ‘fair value’ marker of 1, while the dividend yields a below-market-average 3.5% and will need more borrowing to fund it in the near term. I believe the current valuation is too rich, so I’m avoiding the stock at this stage.
