AstraZeneca (LSE: AZN) hit a magical milestone on Tuesday (13 August), as the share price climbed enough to push the valuation above £200bn. No UK-listed stock has ever done that before.
It comes on the back of CEO Pascal Soriot’s plans for the company to reach annual revenue of $80bn (£62.3bn) by 2030.
It could mean a price-to-sales ratio (PSR) of around 3.2 by then. Is that too high? Eli Lilly‘s current PSR is about 21, and that’s the world’s biggest pharmaceuticals firm. AstraZeneca looks cheap on that score.
What’s behind it?
The chart shows how much the share price has soared. It can’t be down to the company’s Covid-19 involvement, as that added very little to revenue last year (and the famed vaccine is now withdrawn).
No, all eyes are now firmly fixed on the development of new cancer drugs. And we’re seeing a growing portfolio of potential blockbusters.
With H1 results in July, the CEO told us: “Already this year we have announced five positive, potentially practice-changing Phase III studies that are anticipated to meaningfully contribute to our growth.“
The board lifted its full-year guidance, with revenue and core earnings per share (EPS) now expected to grow “by a mid-teens percentage.“
What’s it worth?
I welcomed the appointment of Mr Soriot in 2012. Sales were suffering from patent expiry and generic competition, and needed a shake-up. And seeing how things have gone, it looks like it was a very smart move.
But before get excited and rush off to buy some shares, let’s put things into a bit of perspective.
That £200bn market cap is a UK milestone. But a company that size looks like a tiddler compared to some listed in the US. Tech giant Nvidia can move by the equivalent of an AstraZeneca or more in a day.
Even in the same sector, US stocks can command higher valuations. While AstraZeneca has a forward price-to-earnings (P/E) ratio of 30, Lilly’s is up at 59.
What comes next?
That’s one of the risks that comes with buying the shares, if we compare them with the global competition. I really don’t know why US listings should make such a difference, not when we’re looking at truly global businesses.
Also, that drugs pipeline does show some serious promise. But until it turns into cash streams, promise it what it will remain.
And who knows how long the stock will stay above the £200bn level? Oh, hang on, I do. It was less than a day, at least for now. At the time of writing, the market cap is down below the magic number.
Valuation, valuation
The only way I can think to approach a potential stock buy like this is to forget market caps, share price gains, and all of that. And just make my decision based on today’s valuation and my take on those forecasts.
On that basis, AstraZeneca is a candidate for my next buy. But there are plenty of others too.
