AstraZeneca’s (LSE: AZN) share price is down 11% from its 3 September 12-month traded high of £133.38.
Such a drop raises the question to me of whether a bargain is to be had here.
Are the shares undervalued?
My starting point in ascertaining whether the shares are underpriced is to look at key stock valuation measures.
On the first of these — the price-to-earnings ratio (P/E) — AstraZeneca is bottom of the list of its competitors. It trades at a P/E of just 37.6 compared to an average of 64.6 for its peers. So it looks very cheap on this basis.
The same is true of the price-to-book ratio (P/B) ratio. It is again bottom of its competitor group at a P/B of only 6.1 against an average of 37.3.
And the same applies to the price-to-sales ratio (P/S) too. AstraZeneca shares are presently at 4.9 against a competitor average of 13.2.
To translate these undervaluations into cash terms, I ran a discounted cash flow analysis using other analysts’ figures and my own.
This shows AstraZeneca shares are 55% underpriced at their current £119.35 level. So a fair value for the stock would be £265.22.
It could go lower or higher than that, of course, given the unpredictability of the market. However, it underlines to me how big a bargain the shares look right now.
And the growth prospects?
Ultimately, a company’s share price and dividends are driven by earnings. A risk to AstraZeneca’s is a serious failure in any of its major product lines, as this could prove costly to remedy. It could also damage its reputation.
However, its H1 2024 results showed total revenue up 18% from H1 2023 to $25.617bn. Consequently, full-year 2024 guidance for the figure was raised to mid-teens percent from low double-digit to low-teens.
Analysts forecast that AstraZeneca’s earnings will grow by 16.4% every year to end-2026. Revenue is the total money a business receives, while earnings refers to the remaining money after expenses.
Beyond that, the firm expects $80bn+ in revenues by 2030, against $45.8bn at the end of 2023.
Where will the growth come from?
AstraZeneca has 189 new drugs at various stages of development in its pipeline. By comparison, its leading UK peer GSK has just 71.
And barely a week goes by without a positive announcement related to one of its product lines. October has been no exception. Mid-month saw its Enhertu breast cancer treatment drug gain approval in the huge Chinese market.
Earlier in the month it signed a $1.92bn deal with CSPC to access the Hong Kong firm’s extensive cardiovascular drugs pipeline. This includes the development of ground-breaking lipoprotein work that could benefit patients with high levels of the ‘bad cholesterol’ LDL.
And just before that came the granting of a priority review in the US for the rollout of its Calquence cancer drug.
My investment view
I already own shares in AstraZeneca, based on the firm’s strong earnings growth prospects. These should power its share price and dividend higher in the coming years, in my view.
Given this, I see the recent share price fall as an unmissable bargain opportunity, and I will buy more stock soon.
