It’s always exciting when a share price leaps over 5% in a single day. People chatter about how they have bought the stock. The company’s name is splashed across the business pages of the newspapers. Like compound interest, investors see a price climbing and heap more money in, sending the price even higher. When a company’s share price spikes like this, I always try to analyse what’s triggered the buying spree, as is the case with AstraZeneca (LSE: AZN).
Earlier in the week, AstraZeneca lifted sales forecasts for the second time this year. The preceding four quarters also saw revenue growth for the pharmaceutical company. Total revenue has increased by 22%, to $6.4bn. Core operating profits were up 41%. AstraZeneca’s chief executive, Pascal Soriot, said the “performance reinforces our confidence in delivering sustainable earnings growth”.
After posting these sterling results, it’s easy to see why investors are flocking. Unfortunately, however, they’ve pushed the price-to-earnings ratio to almost 26. Is that a barrier to entry? Perhaps not. The shares attract an unspectacular prospective dividend yield of almost 3%, but with a company growing as rapidly as AstraZeneca, I think this is fairly generous.
Let’s look further at why revenues at the firm have increased so much.
Growing fast
It seems that new medicines are performing very well, with Oncology sales increasing by 50% in the year-to-date. This was largely driven by growth in emerging markets, which posted an increase in sales of 42%. The sales increase in China alone was 35%.
As my colleague Kevin Godbold has noted, AstraZeneca shares were turn-offs a while back — along with other big pharma companies — due to patent expiry issues.
The business has turned itself around now. Indeed, potential investors will be pleased to note that there are several new drugs in the pipeline that have received regulatory approval. This is always a concern of mine when evaluating pharmaceutical companies. To my mind, investors should ensure there is an even wider margin of safety than they would ordinarily expect.
Of course, with the share price buoyant, value investors may be scratching their heads and asking if they have missed the boat with AstraZeneca.
Too late for value investors?
To an extent, I would agree with them: the price is very rich at the moment. Yet, I can’t see it dropping significantly in the future, presenting any value buying opportunity.
Some may say that the prospective dividend at 3% is low, but this doesn’t concern me. If given the choice, I would always rather the company funds growth with its spare cash than automatically hands it back to investors.
Would the high asking price put me off investing? In a word, no. With a long-term horizon of at least 10 years, I would expect continued earnings growth, especially taken on balance with the new products in the pipeline. AstraZeneca is a quality company and in today’s market, I can’t imagine it will ever be undervalued. Unless, of course, something goes wrong.
