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.
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.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
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.