With the UK under lockdown again, the coronavirus vaccination developed by AstraZeneca (LSE: AZN) and Oxford University looks even more important than it did in November. So I’m not surprised to see AstraZeneca shares were the most bought stock by investors on the Hargreaves Lansdown platform last week.
One reason for this may be sentiment — we’re all hoping that vaccines will allow life to return to normal this year. Investing on sentiment isn’t always profitable, but there’s also a more concrete reason. AstraZeneca’s share price has fallen by more than 25% from the all-time high of £10 seen last year, despite rising profits.
I want to increase my exposure to the healthcare sector, so I’ve been taking a fresh look at AstraZeneca. With the firm seemingly on track to deliver sustained growth over the next few years, should I be buying?
Reasons to buy
Buying companies whose performance is already improving often carries less risk than betting on turnarounds. AstraZeneca has been through a tough patch in recent years but the group’s investment in new drugs appears to be paying off. Profits are growing again as new drugs deliver growth. Sales of new medicines rose by 34% to $9.894m during the first nine months of last year, accounting for half of the group’s total sales.
Analysts expect this momentum to continue. The latest broker forecasts suggest AstraZeneca’s pre-tax profit could rise by about 30% in both 2021 and 2022. That’s pretty strong growth for a FTSE 100 share.
Rising profits are expected to be matched by strong cash generation. This could allow AstraZeneca to cut debt and return to dividend growth after several years of flat payouts.
AstraZeneca shares: is the price right?
I think AstraZeneca is a good business and I suspect its reputation will be improved by the way it’s handled the Covid-19 vaccine project. The company has committed not to make any profit from the vaccine and has produced a medicine that can be kept at ordinary fridge temperatures. This should make it cheaper, easier, and quicker to deploy, especially in emerging markets.
However, even the best companies can be too expensive at times. Paying too much for an investment can result in years of below-average returns. This is what I want to avoid. So, are AstraZeneca shares priced to buy?
As I mentioned earlier, the share price has pulled back by more than 25% from last summer’s record highs. At the time of writing, the shares are trading at under £74. This prices the stock at 20 times 2021 forecast earnings, with a dividend yield of 2.8%.
In my view, this is probably a fair price for the business, based on what we know today. However, as a value investor, I like to buy stocks when they’re trading below their fair value. AstraZeneca isn’t quite cheap enough to persuade me to buy today. But it’s certainly a stock I plan to keep watching.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.