Is It Time To Sell AstraZeneca plc?

Growth seems distant and AstraZeneca plc (LON:AZN) shares are expensive…

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

AstraZenecaMost potential and actual AstraZeneca (LSE: AZN) (NYSE: AZN.US) investors will know that American drugs giant Pfizer tried to take the firm over recently. Some will no doubt be hoping that other big pharmaceutical companies will be along soon to pitch in a higher offer.

That hope certainly seems evident in AstraZeneca’s current valuation, and I’d argue that investing now for the first time seems to put investors on the wrong side of binary takeover bet.

Bid hopes

Before Pfizer’s recent offer, AstraZeneca’s shares traded around 3,700p before taking off and arcing at about 4,800p during May at the height of the bid frenzy.

AstraZeneca’s rejection of Pfizer’s wooing was swift and brutal: cough up or get lost, your offers aren’t high enough, the firm effectively said. So Pfizer got lost.

Now AstraZeneca shares are hanging around at 4,342p, well above their pre-Pfizer-offer level, and the view downwards is dizzying. Is it just speculation and hope that a new suitor will arrive — or that Pfizer will find a bigger offer to waggle under AstraZeneca’s nose — that’s keeping the share price floating around like a kite on a breezy day, or is it AstraZeneca’s own stunning forward growth prospects causing the re-rating?

Jam eventually

AstraZeneca isn’t your usual highly rated growth prospect with double-digit earnings’ predictions. In fact, the firm has struggled on growth recently, thanks to loss of exclusivity on some of its bestselling and most profitable drugs. Patents tend to run out over time, generic competition pours into the market, and previously key earners fail to deliver the cash flow and profits the firm relied on.

AstraZeneca is busy developing new products to replace the earnings’ gap, but there’s a long and torturous road to follow before today’s little test-tube creations become tomorrow’s big blockbusters. AstraZeneca’s CEO reckons the process takes years, and that explains City analysts’ predictions on earnings: down 14% this year and down another 3% in 2015.

AstraZeneca’s CEO reckons revenues will probably return to 2013 levels in 2017. That ‘smiley face’-shaped revenue prediction sounds grim for investors holding the shares in the meantime and, in its light, the recent upwards re-rating in valuation seems even more out of place. The re-rating seems like nothing but bid-hope breeze and, if a new bid fails to appear, the AstraZeneca kite could float back down where it came from, taking investors’ capital with it.

Valuation

AstraZeneca’s forward P/E rating is running at about 17.6 for 2015 and the dividend yield looks set to be around 3.9% at the current share-price level. That looks expensive compared to its London-listed peer GlaxoSmithKline, which trades at a rating of just under 14 for 2015 with a better dividend yield of 5.3%. What’s more, City analysts predict earnings’ growth of 9% at GlaxoSmithKline for 2015, beating AstraZeneca to an earnings’ turnaround.

What now?

AstraZeneca could halt, and even reverse, its earnings’ slide in the future, as it develops and markets new drugs. However, that’s a jam-tomorrow proposition and the timescale seems to be measurable in years. Meanwhile, the shares seem to trade at a premium because of bid speculation.

If I’d been holding the shares pre-Pfizer bid, I’d be tempted to take profits. Buying shares now, perhaps in the hope of another bid appearing, seems a non-starter. Surely the best time to buy is before a bid appears; not after, when the shares have gone up and when AstraZeneca has just demonstrated its unwillingness to party.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any stocks mentioned. The Motley Fool has recommended shares in GlaxoSmithKline.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »