FTSE 100 stock AstraZeneca (LSE: AZN) has smashed the index’s performance this year. The pharmaceuticals giant has risen an impressive 19%, compared with the Footsie’s miserable 22% decline.
However, there’s one big reason I’d sell AZN today. It’s specific to the company. I’m actually keen on the healthcare sector generally. Indeed, Alliance Pharma (LSE: APH) is a stock I’d happily buy right now.
Here, I’ll compare and contrast AZN and APH. You’ll be able to see exactly why I’m bearish on the former and bullish on the latter.
FTSE 100 stock vs AIM small-cap
One big difference between AZN and APH is their sizes. The former generated $24bn revenue last year and has a market capitalisation of £118bn. For APH, the numbers are £136m and £393m.
Another big difference is their business models. AZN is a research-led drugs developer. APH acquires and exploits established cash-generative assets (from companies like AZN).
Despite their different sizes and business models, both have wide geographical diversification. AZN is a bit more diversified, with the US its biggest country market (33% of sales). For APH, it’s the UK/Republic of Ireland (59%).
Similarly, APH is a bit more reliant on its top four sellers (46% of sales) than AZN (37%). On the other hand, while AZN is a pure-play pharma business, APH is diversified across consumer healthcare brands (55% of sales) and prescription medicines (45%).
On the above considerations alone, I don’t think it’s possible to say one business is an inherently superior investment to the other.
Valuation conundrum
It’s become the norm for companies to headline ‘core’ earnings per share (EPS). Or ‘underlying’, or ‘adjusted’, or ‘normalised’ EPS. Anything but the statutory number! Almost invariably, companies’ definitions of core EPS produce a higher number than their statutory EPS.
You might expect companies on the lightly-regulated AIM market, like APH, to have a tendency to conjure more flattering core numbers than blue-chip FTSE 100 stocks like AZN. However, the first table below, with the always-highly-flattering core EPS numbers, is AZN. The second, with the far-more-reasonable-looking core/statutory differences, is APH.
|
AZN |
2015 |
2016 |
2017 |
2018 |
2019 |
Average |
|
Core EPS (¢) |
426 |
431 |
428 |
346 |
350 |
396 |
|
Statutory EPS (¢) |
223 |
277 |
237 |
170 |
103 |
202 |
|
Statutory as % of core EPS |
52 |
64 |
55 |
49 |
29 |
51 |
|
APH |
2015 |
2016 |
2017 |
2018 |
2019 |
Average |
|
Core EPS (p) |
3.52 |
3.85 |
4.06 |
4.54 |
5.09 |
4.21 |
|
Statutory EPS (p) |
4.65 |
3.85 |
6.10 |
3.69 |
4.80 |
4.62 |
|
Statutory as % of core EPS |
132 |
100 |
150 |
81 |
94 |
109 |
In my experience, routinely accepting a company’s core EPS at face value doesn’t pay investors in the long run. As such, a company with a wide gulf between core and statutory EPS presents a valuation conundrum.
AZN: overvalued FTSE 100 stock?
At a share price of 9,004p, AZN’s price-to-earnings (P/E) ratio is an eye-watering 54, based on its five-year average statutory EPS. Now, while I reject AZN’s policy of including non-core asset sales in its core EPS as a nonsense, I think some adjustments are legitimate. However, even being as generous as possible, I can only get the P/E down to 35. And even on AZN’s core numbers, the P/E of 28 is still far too rich, in my book.
Meanwhile, at a share price of 74p, APH’s P/E is 16, based on its five-year average statutory EPS, and below 18 on its core EPS. Whichever way I look at it, I see APH as attractively valued on a mid-teens P/E. This is why I rate the stock a ‘buy’.
By contrast, I see AZN’s valuation as somewhere between far too rich (P/E 28) and grossly overvalued (P/E 54). This is why I rate it a ‘sell’.