I’ve been optimistic on the prospects for AstraZeneca (LSE: AZN) for some years now. That’s ever since the fightback against the loss of some key patents and increasing competition from generic manufacturers started to put a serious dent in the firm’s earnings growth.
I’m very much a believer in limited pharmaceuticals patents, as it does help get much-needed drugs out to people who need them at cheaper prices. But at the same time, we need companies like AstraZeneca to make enough profits to provide the incentive for research and development in the first place. As a potential investor, I wouldn’t mind a bit of that for myself.
Turning
It’s a tricky balance, but I think it’s turning round in AstraZeneca’s favour, though only after a long hard slog. Pascal Soriot took over as chief executive in 2012, and immediately set to the task of dumping inefficient non-core activities and switched the firm’s focus back to its drug development pipeline.
That’s was always going to be a long-term and expensive process, though it’s taken longer than I’d expected to start to turn round the firm’s slowing earnings. Analysts are expecting EPS to come in pretty much flat this year, but there’s a 20% rise forecast for 2020.
We still can’t know if this is the long-awaited start of a new earnings growth phase, as we’ve seen various ups and downs in recent years. But investors do seem to be getting back behind the company now. Since the share price started picking up in summer 2016, it’s risen nearly 70%.
Brexit
We need to be cautious, as that period coincides with the Brexit referendum and the following three years of pandemonium that it produced. So it’s surely partly down to a flight to safety as investors have moved towards stocks they see as relatively immune from the effects of our EU departure. That byword for safety, Unilever, for example, has seen its shares gain close to 60% over the same period.
Still, had you invested in AstraZeneca shares at the time Soriot came aboard, even with all the uncertainty that inevitably lay ahead, you’d have done very well indeed. AstraZeneca shares have more than doubled in value since his arrival, and shareholders have been enjoying dividend yields of around 4% per year.
I’ve imposed a rule on myself now that I won’t buy into a recovery situation until after I see some actual results. But the AstraZeneca situation is one where getting in right at the start would have served you well.
Buy now?
After all that, are AstraZeneca shares worth buying at today’s levels? I don’t see the past few years’ share price rise continuing at the same pace, and we are looking at forward P/E valuations of around the 19 mark. So the shares are nowhere near the huge bargain they turned out to be if you’d bought a few years back.
But we’re still looking at forecast dividend yields of around 3.5%, covered 1.5 times by predicted 2020 earnings. And with positive clinical trial results continuing to come through nicely, I really can see a new phase of earnings growth which could drop the P/E significantly over the next few years.
