Sometimes, the stock market just doesn?t make any sense. Take, for example, AstraZeneca (LSE: AZN) (NYSE: AZN.US). It is currently in the midst of a patent cliff and its bottom line is continuing to fall at a fairly rapid rate. For example, earnings are set to be 13% lower this year and a further 6% lower next year. However, shares in the company are up 27% since the turn of the year.
While this could be viewed as an obvious reason to sell, now…
Sometimes, the stock market just doesn’t make any sense. Take, for example, AstraZeneca (LSE: AZN) (NYSE: AZN.US). It is currently in the midst of a patent cliff and its bottom line is continuing to fall at a fairly rapid rate. For example, earnings are set to be 13% lower this year and a further 6% lower next year. However, shares in the company are up 27% since the turn of the year.
While this could be viewed as an obvious reason to sell, now could actually prove to be a great time to buy a slice of AstraZeneca for these four reasons.
- Despite the company’s share price rising so strongly in 2014, it still offers good relative value for money. For instance, AstraZeneca currently trades on a price to earnings (P/E) ratio of 17.2, which may seem rather high when the FTSE 100 has a P/E of 13.8. However, sector peer Shire traded on a P/E of 20+ before it was bought out by US healthcare giant AbbVie. Therefore, while AstraZeneca is not exactly cheap, it could see its rating move higher over the medium term as it begins to exit its patent cliff.
- AstraZeneca’s pipeline is in much better shape than it was a year or two ago. New management has ended the share buyback programme, maintained the dividend and focused on acquiring drugs and companies that have the potential to boost sales over the long run. For instance, AstraZeneca has purchased Bristol-Myers Squibb’s share of their diabetes joint-venture, which could yield improved sales and profitability moving forward.
- Bid approaches from Pfizer have helped support AstraZeneca’s share price during 2014 and more bids could be on the horizon. That’s because a number of large, US pharmaceutical companies are struggling to deliver top- and bottom-line growth. So, with interest rates low, M&A activity seems to be an obvious fix and AstraZeneca, as we have seen in 2014, is an obvious candidate for a takeover.
- Although its share price has risen strongly, AstraZeneca remains a company that offers a decent yield of 3.7%. With sales and profitability growth offering huge long-term growth potential, shareholders could see dividends per share rise at a brisk pace over the medium term. This, along with AstraZeneca’s bid potential, attractive relative valuation and impressive pipeline, means that it could be worth buying right now.
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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.