The AstraZeneca (LSE: AZN) share price near 10,744p is around 9% down from its January peak. But is that dip large enough for investors to consider buying shares in the science-led biopharmaceutical company?
I think it may be. After all, the business is one of the most dynamic growth stories in the FTSE 100. And the financial indicators don’t suggest an outrageous valuation given the ongoing growth potential displayed by the enterprise.
A productive R&D pipeline
To put the recent share price action in context, the stock is about 25% higher than it was a year ago. But the big prize for investors is the long-term potential of the business. For example, over the past 10 years, the shares have moved up by around 252%. And shareholders have also enjoyed a stream of dividends along the way.
Is it possible for AstraZeneca to deliver similar performance for its shareholders over the coming decade? Maybe. After all, the research and development (R&D) pipeline has been on fire over the past few years. And it’s been spitting out new commercial-grade medicines and treatments at pace. Indeed, the situation has enabled the company to rebuild and grow its earnings in a meaningful way.
The compound annual growth rate for normalised earnings is running at around 23%. And I reckon that’s a figure that can put many smaller growth companies to shame. But there’s little sign of the business easing the pace. City analysts expect earnings to elevate by more than 83% this year and almost 20% in 2024.
However, it’s worth bearing in mind that AstraZeneca stock languished low and unloved 10 years ago. Patent expiry issues had taken their toll on the business and the sector. And the R&D pipeline had yet to get itself into gear.
From zero to hero
Most investors back then were looking at the company as a business in decline. And those tempted to buy the shares considered it a cash-cow dividend payer at best. That said, some prescient investors were talking about the potential in the R&D pipeline.
So the rise of AstraZeneca stock has been driven by two things. The first is the way the shares have tracked and anticipated growth in earnings. And the second is the way the valuation has re-rated higher to reflect the improved growth picture.
Therefore, my guess is the potential for a further uprating of the valuation may be limited in the decade ahead. But there’s still a good chance that growth in earnings may drive the stock higher.
Nevertheless, nothing is certain or guaranteed. And that’s the case even though the immediate forecasts for earnings look robust now. It’s always possible for the R&D pipeline to dry up. Or there could be a series of research failures that cannot be translated into commercial products.
However, the company’s news feed continues to be vibrant with positive announcements. And I see the business as well worth investors’ deeper research time. To me, the shares look like they’d sit well in a diversified long-term portfolio that wants to embrace both income and growth.
