The AstraZeneca share price is at all-time highs. Should investors be wary?

Shares of AstraZeneca plc (LON: AZN) look too expensive to me right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Amid a choppy market environment, shares of AstraZeneca (LSE: AZN) are performing extremely well. But is this a reason to buy them at their current price? Let’s examine the reasons behind the stock’s performance, as well as whether the current valuation represents an attractive investment opportunity.

Recent successes

Although the last year was an up and down period for AstraZeneca shareholders, patient investors were rewarded with a strong trading update in July. Priced at 7,327p a share, the stock is currently trading at all-time highs, and it’s easy to see why. Product sales were up 17% in the first half of 2019, and total revenue increased by 14%. 

Both revenue and earnings per share beat analysts’ expectations — the former by $251m (£207m) and the latter by $0.13/share (£0.11/share). This outperformance has driven the stock higher by over 15% since the release of the earnings report. 

Drug sales are on the rise

Over the last few years, AstraZeneca has been increasing its investment in its oncology division, and these trading results are evidence of that. Revenue from the oncology segment as a whole grew by 58% in the first half of 2019. These increases were led by lung cancer drug Tagrisso (£1.16 bn) and ovarian cancer treatment Lynparza (£429m), as well as Imfinzi (£547m), prescribed for bladder and urinary tract cancers. 

A few months ago I wrote that CEO Pascal Soriot deserves a lot of credit for AstraZeneca’s much-improved results. It was his vision to move the company to focus on oncology treatment, and this strategy seems to be bearing fruit. Nevertheless, I believe that from an investment standpoint, the business is just too expensive to buy.

Too rich for my blood

Shares of AstraZeneca currently trade at a forward price-to-earnings ratio of 24, well above the PE ratio for the FTSE 100 as a whole, which stands at 15.6. Moreover, it yields a dividend of 3.18%, which is also below the FTSE 100 average (4.74%). And as my colleague Roland Head points out, the company’s net debt has risen significantly over the last four years — from £6.43bn to £13.44bn. He believes that management’s desire to maintain the dividend at current levels has forced it to rely on debt to fund investment, and I agree.

Companies that have above-average valuations tend to underperform, statistically speaking. This is particularly true in times of higher volatility, as has been the case in recent months. When everything is falling, those who bought highest will suffer the most pain. 

There is also the nagging uncertainty surrounding how Brexit will affect the entire pharmaceutical industry. If a no-deal scenario does materialise, that could seriously impact the ability of AstraZeneca (and other companies in the sector) to export drugs to the European Union. I believe that the market is not accurately pricing in this possibility, and for these reasons I’ll be staying away from this stock. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stepan Lavrouk owns no shares mentioned. 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.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »