The AZN share price has stumbled. Is now a good time to buy the stock?

The AstraZeneca share price has fallen to a valuation that makes the stock look cheap compared to its growth potential, says this Fool.

| 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.

positive mental health woman

Image source: Getty Image

The AstraZeneca (LSE: AZN) share price outperformed the FTSE 100 by a substantial margin in 2020. However, over the past 12 months, the stock has lagged the UK’s leading equity index.

Excluding dividends, shares in AstraZeneca have returned -1%. Meanwhile, the lead index has added nearly 18%. Over the past month, shares in the pharmaceutical giant have lost 4%, compared to a flat FTSE 100. 

This performance seems to suggest the market has become disinterested in the enterprise. But I think that could be a mistake. Indeed, the company’s latest trading update indicates to me the group is stronger than ever. 

AZN share price growth 

AstraZeneca has risen to fame over the last year as the company’s cheap and effective coronavirus vaccine has saved tens of thousands of lives. The decision to sell the vaccine at cost to many customers has generated a spate of good publicity for the group. In the second quarter, the company generated $900m of sales from its coronavirus vaccine. In the same period, US drug giant Pfizer reported sales of $7.8bn for its treatment.

The company’s vaccine catapulted it onto the front pages of newspapers worldwide, but it’s only a tiny part of the overall business. In the second quarter, group sales totalled $8.2bn. Rising sales of treatments to emerging markets and oncology helped boost revenues 31% year-on-year. 

Based on these revenue trends, City analysts expect the company to report earnings per share of around 523p this year. This suggests the AZN share price is trading at a forward price-to-earnings (P/E) multiple of 22. Further growth of 28% is expected in 2022. Based on these targets, the stock’s selling at a 2022 P/E of 17.3. 

These numbers don’t look to me to be particularly demanding. The stock’s trading at roughly the same valuation as its FTSE 100 peer, Hikma. What’s more, a 2022 P/E of 17.3 implies the AZN share price is dealing at a PEG ratio of less than one. This implies the stock may offer growth at a reasonable price. 

Of course, these are just forecasts. There’s no guarantee the company will hit earnings projections in the years ahead. 

Risks and challenges

If the company’s growth doesn’t live up to expectations, the stock may be expensive at current levels. Challenges the group may face include higher research and development costs. Regulatory delays in approving new treatments may also hold back growth.

AstraZeneca’s sales have also faced pressure in the past as its treatments have lost patent protection, allowing competitors to manufacture the same drug at a lower cost. 

Despite these potential headwinds, I think the recent performance of the AZN share price could offer an opportunity. That’s why I’d buy the stock for my portfolio today.

The national champion has a market-leading position in vaccines and oncology, and its current valuation suggests the market is overlooking its long-term growth potential. 

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of British bank notes
Investing Articles

Forget income bonds! I’d buy these 2 high-yield UK dividend shares

These two UK dividend shares offer significantly more attractive passive income than boring bonds, in my opinion.

Read more »

Family holding hands in a circle on a beach
Investing Articles

11% dividend yield! 1 FTSE 100 dividend share to buy today

I'm hunting for the best dividend shares in the FTSE 100 and this industry leader could be one of my…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

How I’d invest in UK dividend stocks to generate passive income for retirement

How I plan use the iShares UK dividend fund to invest in high-yield stocks in the UK to generate passive…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

GSK shares plummet 15% in a week! What’s going on here?

GSK shares had a bad time last week. They're down 15% as investors' sentiment soured ahead of litigation proceedings in…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Stock market recovery: have all the bubbles now burst?

Asset bubbles keep on coming, and here's what I'm doing to navigate through them and invest for the stock market…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

UK shares can offer a lucrative path for passive income. Our writer considers a plan to double his State Pension.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 of the best shares to buy now with £2,000

I reckon the best shares to buy now have strong growth in earnings and recent good news flow, such as…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m aiming for £500 a month in income from dividend stocks 

Here's my three-step plan for achieving a growing income from dividend stocks and three companies I'd use to help execute…

Read more »