Why I’d Buy Hikma Pharmaceuticals Plc, Hold Shire plc & Sell AstraZeneca plc

The recent market sell-off just reinforces my view on Hikma (LSE: HIK), Shire (LSE: SHP)  and AstraZeneca (LSE: AZN).

So, what should you do with them right now?

Two Scenarios

Their shares carry very different risk profiles, and there are two investment strategies here. 

To keep scenario A as simple as possible, I’d structure a portfolio in which all my savings are split among these three shares by giving them an equal weight — the same British pound value for each stock. 

This way, I’d achieve a properly balanced low-beta investment portfolio of 0.9 that should outperform the FTSE 100 if the market turns south. But I do not fancy Astra, and Hikma’s growth rate is truly appealing.

Excluding a different weight for each stock in the investment portfolio, then the only possible scenario B is to choose one single stock and pull the trigger.

Which one, though? 

M&A risk at Shire

Shire is the best of all based on fundamentals, but its stock carries more risk now than at any given time this year. Its latest deal-making ambitions will be debated for months, and Baxalta could be a pricey target — there is a significant risk that we have to pay over the odds for its short-term prospects. 

Shire stock trades on a forward earnings multiple of 28x, which represents a big premium against the market. Consider that the long-term average P/E of the FTSE 100 is 15, which is not far away from the main index’s current valuation. That said, the average level of operating profitability for the index’s constituents is several percentage points lower than that of Shire, while its dividends are expected to rise at 10%-20% a year. 

Shire beats both the market and Astra, which is not a valid alternative, I’d say — but Hikma is more attractive!

Hikma vs Astra: an obvious call!

Hikma’s growth prospects have become even more enticing following its acquisition of Roxane Laboratories and Boehringer Ingelheim Roxane for $2.65bn. 

Its beta is the highest in the peer group and its shares trade on forward net earnings multiples that are a bit lower than those of Shire. 

Hikma’s equity value is about 20% that of Shire and 10% of Astra’s, but is set to grow at a very fast pace if management keep up the good work it has done in recent years. Its capital allocation strategy makes a lot of sense, and has contributed to a two-year performance that reads +125%.

In spite of recent volatility, Hikma has fallen only 2% over the last month of trade, having outperformed Astra by one percentage point and Shire by nine percentage points. These trends could well last until the end of 2015 and beyond.

Finally, the problem with Astra is that we know its long-term growth projections, but we don’t know how Astra will achieve its ambitions goals. 

The most mature business of the three, Astra is an obvious play either for investors who believe that a change of ownership will materialise or for those who are interested in the sector and consider its beta, at 0.6, a good sign of a lower level of risk. 

Well, I wouldn’t bet on that based on its trading multiple of 32x forward earnings. 

But I have in mind pharma stock that trades at less than 20x earnings, which surely deserves your attention.

It's not late to buy a really serious value play in the pharma space: its shares are truly defensive and rose 20% this week in spite of market volatility!

Its prospects are discussed in this exclusive FREE reportwhich will help you determine how likely is for this gem to double in value into 2016. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.