2014 has been a super year for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US). Shares in the pharmaceutical giant have risen by 24% since the turn of the year, which is far better than the performance of the FTSE 100 over the same time period. The UK?s leading index of shares is up just 1% year to date. However, after its strong share price performance, is it now too late to buy a slice of AstraZeneca? Or, could it still make a positive…
2014 has been a super year for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US). Shares in the pharmaceutical giant have risen by 24% since the turn of the year, which is far better than the performance of the FTSE 100 over the same time period. The UK’s leading index of shares is up just 1% year to date. However, after its strong share price performance, is it now too late to buy a slice of AstraZeneca? Or, could it still make a positive contribution to your portfolio?
Clearly, a key reason as to why AstraZeneca’s share price has risen so strongly during 2014 is the bid approaches from US peer, Pfizer. Without these approaches, it is unlikely that AstraZeneca’s share price would have risen to quite the same level as at present. However, the reason for the bid approaches appears to be a mixture of AstraZeneca’s actions, but also the situation in the wider pharmaceutical sector.
Indeed, major pharmaceutical companies, such as Pfizer, have been struggling to generate meaningful top line growth for a number of years. For whatever reason, they have been unable to develop new drugs with peak sales numbers that push revenue higher. At the same time they have tended to run levels of financial leverage that are only moderate and, with interest rates being at historic lows (but set to move higher) this has created something of a ‘perfect storm’ for them to seek-out M&A activity.
In other words, a lack of sales growth, plus a low interest rate environment, plus only moderate amounts of debt on their balance sheets has created a significant amount of M&A activity in the sector. While interest rates may rise in coming years, they could remain low enough to entice more activity in this space moving forward.
Of course, a key reason for the bid approaches is AstraZeneca’s pipeline. As recently as two years ago, the company’s drugs pipeline looked weak and lacking in potential. Today, it is remarkably diverse and has vast potential. The key to this drastic change has been new management, with the adoption of a shift in focus towards acquiring other companies and purchasing drug prospects that could grow the company’s top and bottom lines in future years. New management has also put the company’s finances first; ending the share buyback programme and maintaining (as opposed to growing) dividends per share. The result is that AstraZeneca, while set to experience further declines in profitability over the next two years, has a bright long term future.
With shares trading on a price to earnings (P/E) ratio of 16.8, it may appear as though AstraZeneca is overpriced. However, with a continually improving pipeline that could rejuvenate the company’s earnings, as well as the potential for further bid approaches, AstraZeneca could still prove to be a top notch investment that it is not too late to buy a slice of.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.