The last few years have been incredibly challenging for AstraZeneca (LSE: AZN). The company has suffered major falls in its earnings due to the loss of patents on key drugs. Generic competition has caused its earnings per share to drop by 37% between 2012 and 2016, with further falls expected in the current financial year.
However, following investment in its pipeline in recent years, investors have become increasingly optimistic about its prospects. After a third quarter update on Thursday, is there still cause for optimism regarding the company’s future?
Encouragingly, AstraZeneca has reported that the impact from the loss of exclusivity on its products is starting to recede. Sales in the quarter declined by just 2% at constant currency, and this shows that its strategy is working as planned. Alongside investment in its pipeline, there have been major cost cuts which continue to lessen the impact of the sales decline on its bottom line. For example, research and development costs moved 1% lower at constant currency, while its operating costs moved 11% lower.
The result of this performance is expected to be a core earnings per share figure for the full year which is at the favourable end of guidance. This means that a low-teens percentage fall in earnings is on the cards for this year, which may help to boost investor sentiment in the short run.
As mentioned, the company is investing heavily in its product pipeline. This has only been possible because of the strong balance sheet and cash flow of the business, and it is set to deliver positive earnings growth next year. While a rise of just 1% may be forecast for 2018, more earnings growth could be ahead as the impact of a loss of patents continues to recede and it is replaced with strong growth in the areas of the business in which it has invested in prior years.
With an improving outlook, it is perhaps unsurprising that AstraZeneca trades on a price-to-earnings (P/E) ratio of 17.8. This appears to be fair value for a company which has the potential to increase its profitability at a brisk pace in future. Furthermore, at its current price level it has a dividend yield of 4.2% from a shareholder payout which is covered 1.3 times by profit. This suggests that its income prospects are also bright.
As well as its capital growth and income prospects, AstraZeneca also has defensive appeal. It is less highly correlated to the performance of the wider economy than many of its FTSE 100 index peers. This could provide its investors with greater stability and resilience than they may be able to obtain in most stocks. As such, with its third quarter results showing continued improvements in its financial performance, now could be the right time to buy it for the long run.
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Peter Stephens owns shares in AstraZeneca. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.