On February 11, 2016, AstraZeneca (AZN) was trading at a forward PE (price-to-earnings) multiple of ~14.3x, compared with the industry average of 15.2x. Over the last year, the company’s forward PE has been in the range of 13.9x and 17.3x. The company is trading at a higher PE than Sanofi (SNY), which trades at 12.1x. Competitors Novartis (NVS) and GlaxoSmithKline (GSK) are trading at higher PE multiples, of 14.4x and 15.8x, respectively.
The fundamental factors affecting stock prices and valuation include the performance of growth platforms as well as the exclusivity of blockbuster drugs. Furthermore, the foreign exchange rates play an important role in the profitability of the company and consequently affect the stock prices and valuation. This series covers the segment-wise performance of products and the major drivers of this performance.
From an investor’s point of view and considering the relatively stable and visible nature of the earnings, the two best valuation multiples for valuing companies such as AstraZeneca are the forward PE and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples.
PE multiples represent what one share can buy for an equity investor. Based on the multiple range of the last five years, AstraZeneca’s current valuation is neither high nor low, and its PE multiple has ranged from ~6.2x to ~19.5x. AstraZeneca’s valuation multiple has followed the industry’s overall trend over the last five years, except for a part of 2014. Whether the healthcare sector’s forward PE multiple rises or falls, AstraZeneca will definitely be affected.
On a capital-structure-neutral and excess-cash-adjusted basis, AstraZeneca currently trades at ~9.1x, which is much lower than the industry’s average of ~11.3x. Competitors such as Novo Nordisk (NV), Novartis (NVS), Sanofi (SNY), and GlaxoSmithKline (GSK) have forward EV-to-EBITDA multiples of 15.2x, 14.3x, 8.9x, and 10.0x, respectively.
Stock price performance
According to data from February 11, 2016, AstraZeneca’s stock value has declined by ~12.9% over the last 12 months, while the iShares Core S&P 500 ETF’s (IVV) has declined by ~9.5%. GlaxoSmithKline (GSK) reported a ~10% decline in stock value, Sanofi (SNY) declined by ~18.2%, and Novartis (NVS) declined by ~26.7% during the same period.
Analysts estimate that the stock has the potential to return ~44.4% over the next 12 months. Analysts’ recommendations show a 12-month targeted price of $42.09 per share, against the last price of $29.15 per share on February 11, 2016. Also, ~14% of the analysts recommend a “buy” and 71% of the analysts recommend a “hold,” according to Bloomberg’s consensus. Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.
To divest any risk, investors could consider ETFs such as the VanEck Vectors Pharmaceutical ETF (PPH), which holds ~4.5% of its total assets in AstraZeneca, or the First Trust Value Line Dividend ETF (FVD), which holds ~0.5% of its total assets in AstraZeneca. Please refer to AstraZeneca: A Leader in Prescription Drugs for a company overview.