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Is AstraZeneca’s Valuation Improving Compared to Peers?

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AstraZeneca’s valuation

On August 23, 2016, AstraZeneca (AZN) was trading at a forward PE (price-to-earnings) multiple of ~16.9x compared to the industry average of 15.7x. Over the last year, its forward PE has traded in the range of 13.5x–17.2x.

The company is trading at a higher PE than Sanofi (SNY), which trades at 12.6x. Other competitors such as Novartis (NVS) and GlaxoSmithKline (GSK) are trading at a nearly similar PE of 16.4x and 16.5x, respectively, to AstraZeneca.

The fundamental factors affecting stock prices and valuations include the performance of growth platforms as well as the exclusivity of blockbuster drugs. Foreign exchange rates also play an important role in a company’s profitability and consequently affect stock prices and valuations.

In this series, we’ll look at some major factors and segment performances of AstraZeneca products for a better understanding of each of these drivers. For a company overview, please refer to AstraZeneca: A Leader in Prescription Drugs.

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Forward PE

From an investor’s point of view, the two best valuation multiples used for valuing companies such as AstraZeneca are forward PE and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples, considering the rather stable and visible nature of their earnings.

PE multiples represent what one share can buy for an equity investor. Based on the last five years’ multiple range, AstraZeneca’s PE multiple was 6.2x–19.5x.

Forward EV-to-EBITDA

On a capital-structure-neutral and excess-cash-adjusted basis, AstraZeneca currently trades at ~12.9x, which is higher than the industry average of ~11.8x. Other competitors such as Novo Nordisk (NVO), Novartis (NVS), Sanofi (SNY), and GlaxoSmithKline (GSK) have forward EV-to-EBITDA multiples of 14.2x, 16.4x, 9.2x, and 10.6x, respectively.

Analyst recommendations

According to the data on August 23, 2016, AstraZeneca’s stock value has increased by ~11.9% over the last 12 months. Analysts estimate that the stock has the potential to return ~17.8% over the next 12 months.

Analyst recommendations show a 12-month target price of $39.89 per share compared to the last price of $33.85 per share on August 22, 2016. About 11% of the analysts recommend a “buy,” 78% recommend a “hold,” and 11% recommend a “sell,” according to a Bloomberg consensus. Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.

Investors can consider ETFs such as the First Trust Value Line Dividend ETF (FVD), which holds ~0.6% of its total assets in AstraZeneca, in order to divest the risk.

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