Why AstraZeneca plc Provides Poor Shareholder Value

In this article I am explanining why I believe AstraZeneca (LSE: AZN) (NYSE: AZN.US) is a poorly valued stock at current prices.

Price to Earnings (P/E) Ratio

Unless one has been living in a box for the past month or so, it has been difficult to ignore US pharma giant Pfizer’s controversial AstraZenecabid to hoover up British rival AstraZeneca. Of course, the bid has been a huge driver behind AstraZeneca’s share price during that time, and although the stock now retreated following the failed takeover attempt, the firm could still be considered an expensive proposition.

Based on current earnings forecasts, AstraZeneca was recently changing hands on P/E ratings of 16.9 and 17.4 for 2014 and 2015 correspondingly. These readings fall outside the bargain benchmark of 15, readouts under which are usually deemed inexpensive, and given the firm’s sickly revenues outlook this could be deemed poor value.

Price to Earnings to Growth (PEG) Ratio

Indeed, AstraZeneca has been unable to get to grips with the effect of crippling patent expiration across a variety of its key drugs, a phenomenon which looks set to keep group sales under the boot over the next couple of years.

The company has seen earnings slide in each of the past two years due to a host of exclusivity losses, and analysts forecast further woes in store. A dip of 16% is chalked in for 2014, with an additional 3% fall anticipated for 2015. Of course, expectations of further earnings falls result in invalid PEG ratings for both of these years.

Market to Book Ratio

After subtracting total assets from total liabilities, AstraZeneca is left with a book value of some £13.9bn. At current prices this produces a book value of £18.54 per share, in turn creating a market to book ratio of 2.4.

A reading around or below 1 is usually considered decent value, so in this regard AstraZeneca — although far from hair-rising based on this criteria — is hardly a hugely attractive proposition.

Dividend Yield

In the wake of continued pressure on the earnings front, AstraZeneca has kept the full-year dividend on hold at 280 US cents per share since 2011. Current analyst consensus points to a resumption in the full-year dividend this year and next despite the prospect of fresh trouble, however — a payout of 281 cents for this year is expected to rise to 282 cents in 2015.

These tentative increases keep the yield at 3.9%, surpassing the FTSE 100 average of 3.2% and beating a corresponding figure of 2.6% for the entire pharmaceuticals and biotechnology sector.

A Poor Value Stock Selection

Given the criteria discussed above, I believe that AstraZeneca is a disappointing stock for those seeking decent value. With the company’s investment-heavy R&D transformation strategy not ready to deliver a meaningful earnings improvement until around 2018 at the earliest, and the competition continuing to chip away at its already-weak sales drivers, in my opinion the huge risks facing the firm are not fully factored into the share price at present.

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Royston does not own shares in any of the companies mentioned in this article.