FTSE 100 pharmaceutical giant AstraZeneca (LSE: AZN) has seen its share price rise by around 25% over the last 12 months. AstraZeneca shares have now doubled over the last five years.
Its growth has accelerated under chief executive Pascal Soriot. I’d like to own a slice of this market-leading business, but I need to be sure there’s still some value left for me. Here’s what I’ve decided.
Strong momentum
The Anglo-Swedish group’s sales rose by 26% to $33.4bn in 2021, excluding around $4bn of revenue from Covid-19 vaccine sales. I’ve ignored this as I don’t see this product as part of the firm’s ongoing business. At least, I hope it won’t be.
This revenue growth supported a 32% rise in adjusted earnings, which rose to $5.29 per share.
Soriot says the company had 13 blockbuster medicines in 2021 – those with sales of more than $1bn. This list included two new ones, Calquence and Fasenra.
These numbers suggest to me that Mr Soriot’s strategy of pursuing acquisitions alongside in-house drug development is really starting to pay off.
Growth has stayed strong so far this year. The group’s sales rose by 56% to $11.4bn during the first quarter, while adjusted earnings were 16% higher.
What’s the risk?
One thing that’s stopped me from buying AstraZeneca shares in recent years has been the company’s poor cash generation. Mr Soriot’s spending spree has been financed mostly by borrowed cash – net debt has risen from under $5bn to $24bn since 2014.
If the company had continued down this path, then a dividend cut might have been needed. Fortunately, I can see signs that its cash-guzzling days may soon be in the past.
The group’s free cash flow (surplus cash generated by the business) rose from $3.6bn to $5.6bn in 2021. Broker forecasts suggest this figure will rise to more than $7bn in 2022 and could top $10bn in 2023.
Here’s what I’m going to do
It looks like the big investments are starting to produce the best result of all – cash. However, AstraZeneca shares are still trading on 19 times forecast earnings, with a dividend yield of just 2.3%.
That’s a significant premium to FTSE 100 rival GSK, whose shares currently trade on 14 times earnings, with a prospective yield of 3.1%.
Although its earnings are expected to rise more quickly than those of GSK over the next few years, I’m not convinced that will be enough to justify the stock’s premium.
To help me decide, I’ve done some number crunching. What I found is that for me, AstraZeneca shares are already getting close to their fair value. I don’t think there’s enough value left for me to buy after the stock’s recent rebound.
On the other hand, GSK looks more promising to me. I plan to take a look at this stock over the coming weeks to see whether it could qualify for a slot in my portfolio. I’ll report back here with my findings.
