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Is Now The Right Time To Buy AstraZeneca plc?

astrazeneca2AstraZeneca (LSE: AZN) (NYSE: AZN.US) shares remain 20% higher than they were at the start of the year, despite having fallen by 10% since the firm’s board rejected a £55 per share takeover bid from US giant Pfizer.

Now that AstraZeneca’s valuation has cooled off somewhat, are the shares a buy again, or are they still too pricey?

I’ve taken a closer look at AstraZeneca’s performance and valuation to find out more.

Valuation

Let’s start with the basics: how is AstraZeneca valued against its past earnings, and the market’s expectations of future earnings?

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

10.6

2-year average forecast P/E

16.5

Source: Company reports, consensus forecasts

The picture painted here is clear: AstraZeneca’s near-term earnings are expected to fall substantially below the firm’s historical average, but this is not expected to be a permanent decline.

Investors are willing to credit AstraZeneca for future growth, and are also pricing in the possibility of a second bid attempt by Pfizer, which some — including star fund manager Neil Woodford,– believe is likely.

What about the fundamentals?

Buying into a company whose share price is already priced for a bid is a risky strategy.

After all, AstraZeneca’s share price has fallen by 6% since 23 September, when changes to US tax rules made a bid less financially attractive for US companies. Should Pfizer categorically rule out a second bid, I’d expect AstraZeneca shares to take another tumble, back towards the £38 level they traded at before Pfizer’s bid interest became public.

Given all of this, do AstraZeneca’s fundamentals support a buy at today’s price?

Metric

5-year compound average growth rate

Sales

-4.8%

Core operating profit

-9.2%

Core earnings per  share

-4.4%

Dividend

+4.5%

Source: Company reports

For me, AstraZeneca’s falling sales and profits over the last five years would normally be a warning flag — buying into a firm with a high forecast P/E and falling sales isn’t usually a great idea.

However, AstraZeneca remains a world leader in certain areas and is a very large — and still profitable — company, offering a 4% yield. I believe that the firm’s turnaround will ultimately be successful, and will generate substantial value for shareholders over the next five to ten years.

Buy AstraZeneca?

In the short term, however, I plan to wait and see if AstraZeneca gets any cheaper: this might mean missing out if Pfizer does make a second bid, but as a long-term income investor, I’m more interested in locking in a strong long-term income when I trade, rather than speculating on one-off takeover gains.

I rate AstraZeneca as a hold, as for me it is not quite cheap enough to discount the expectation of further declines in sales and profits.

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Roland Head has no position in any shares mentioned. 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.