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AstraZenecaThe share price of (LSE: AZN) has risen 38% from its 12-month low of £94.60 on 12 February, making it the first UK company with a market capitalisation of over £200 billion amid much media fanfare.
Many investors might look at these numbers and conclude that there is no value left in the stock. This view is understandable, but in my experience as a former investment banker, it is not necessarily true.
A rise in a company’s share price may simply be because it is fundamentally worth more than it was before, or the market may simply be trying to get to the company’s true value.
The key point is that the stock may even be worth more than the new share price suggests. In my opinion, that is the case with AstraZeneca.
How much value is still in the shares?
The pharmaceutical giant is still trading at the lower end of its peer group on several important valuation metrics.
The price-earnings ratio (P/E) is 40.7, the second lowest, over Merck at 21. The rest of the group consists of Novo Nordisk at 45.3, AbbVie at 64.6 and Eli Lilly at 113.1.
In terms of price-to-book ratio (P/B), the British company, together with Merck, has the lowest value with a value of 6.6, while the average of the peer group is 38.6.
I have not taken into account the closest British competitor. GSK – in the group due to its much smaller size. But for comparison: It has a P/E ratio of 16.1, a P/B ratio of 4.5 and a P/S ratio of 2.1.
In cash terms, a discounted cash flow analysis shows that AstraZeneca is undervalued by 48% at its current share price of £130.53.
A fair value for the stock would therefore be £251.02, although it could of course be lower or higher.
Do the growth prospects support the valuation?
There are risks associated with any business and AstraZeneca is no exception. The biggest risk I see is that one of its key products fails.
Fixing this error could be very costly and could also lead to litigation for any negative impact on patient health, which could cause significant damage to the company’s reputation.
However, analysts’ consensus forecasts assume that the company’s earnings will grow by 16.6% annually until the end of 2026. Earnings per share are expected to grow by 17.7% annually by then. And return on equity is expected to be 29% by then.
Earnings growth should lead to an increase in a company’s share price (and dividend) over time.
AstraZeneca’s results for the first half of 2024, released on July 25, showed an 18% increase in total revenue to $25.617 billion compared to the first half of 2023, due to increases of 22% each in the cancer, CVRM (cardiovascular, renal and metabolic) and respiratory and immunology businesses.
Should I buy more?
I have gradually built up my share in the company from a much lower level and am therefore happy with this position.
If this were not the case, I would have no concerns about buying the stock at the current price and would do so.
The shares still appear to be significantly discounted on all the key metrics that I believe most accurately reflect true value.
