The AstraZeneca (LSE:AZN) share price is up 50.6% over three years. Its parent index, the FTSE 100, rose a more modest 10.5% over the same time.
Back in February 2020, £300 would have bought four shares in AstraZeneca at 7,446p each. The investment would have cost £297.84. It would now be worth £448.40. That’s not bad at all for capital gain. But there is more. AstraZeneca paid out 639.9p per share in dividends over the last three years. So, simply add the value of the dividends on and the investment is worth £474.00 now, which is a 59.1% gain.
Buying shares in this pharmaceutical giant three years ago would have been a fantastic investment. I did not buy back then. There is no point in dwelling on that. I will do better by asking whether I should buy AstraZeneca shares now in expectation of similarly impressive long-term gains.
AstraZeneca shares have a high P/E ratio
There are some problems here with the stock priced in pence and earnings reported in either dollars or cents, but AstraZeneca currently trades at a price-to-earnings (P/E) ratio of 18. That is high compared to its index and major competitors. But, what about when I factor future expected earnings growth into the equation?
It’s no secret that AstraZeneca has generated quite a bit of revenue from COVID medicines. Sales jumped from $27bn in 2020 to $37bn in 2021 to $44bn in 2022. Reported earnings per share fell from 243¢ in 2020 to 7.85¢ because the company was supplying COVID jabs on a cost basis. By November 2021, that policy had ended (except for the poorest of countries) and in 2022, reported EPS hit 211¢.
But analysts don’t like to work with reported numbers, they like to use normalised ones. These adjust the reported number to negate the effect of unusual or one-time expenses and smooth the effects of the economic cycle or temporary strategies or policies, like selling vaccines at cost. Equity analysts have pencilled in normalised EPS of 728¢ and 896¢ for AstraZeneca in 2023 and 2024 respectively versus 389¢ in 2022.
Earnings growth
So we have a forecasted one-year EPS growth rate of 87% and a two-year one of 49%. The price-to-earnings growth (PEG) ratio augments the P/E ratio with earnings growth rates. Based on the one-year growth rate, AstraZeneca’s PEG ratio is 0.21 and on the two-year one, it’s 0.37. The ratio’s originator, Peter Lynch, calls anything under one, growth at a reasonable price stock. Therefore, he, and I, might be very interested in AstraZeneca, at least for the next couple of years.
Beyond that, analysts seem to have settled on a longer-term EPS growth rate of 15.5%. That rate is less to do with COVID medicines — which have been a winner but sales are expected to tail off — and more with the pipeline of new medicines. Based on this rate, AstraZeneca shares have a PEG ratio of 1.2. It’s no longer a growth at a reasonable price stock. And with the risks inherent in pharmaceutical companies’ pipelines — a drug might never make it to market despite billions being spent developing it — I am cooling on the idea of buying AstraZeneca. I am not going to be adding it to my Stocks and Shares ISA any time soon.
