AstraZeneca (NYSE:AZN) has had a lackluster stock price performance in recent years. Despite the lackluster stock price performance, AstraZeneca sports a high dividend yield of 6.37%, and has increased its dividend rate every year for the last ten years. In addition, the company has a healthy balance sheet with little debt, and high return on equity and profit margins. Nevertheless, the stock is now selling at mid single digit P/E and the lowest valuation for the past 10 years. For these reasons, the stock deserves a good look.
Company Description (Source: Google Finance)
AstraZeneca plc is a global biopharmaceutical company. AstraZeneca discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. It has a range of medicines that includes treatments for illnesses, such as its antibiotic, Merrem/Meronem and Losec/Prilosec for acid related diseases. AstraZeneca's products include Crestor, Atacand,Seloken/Toprol-XL, Plendil, Onglyza, Zestril, Symbicort and Zoladex.
Vital Statistics (Source: Google Finance)
Recent Price: $43.96 (as of 05/07/2012)
52-Week Range: $40.89 - $52.54
Market Capitalization: $55.86 B
Shares Out.: 1.27 B
P/E Ratio: 6.77
EPS: $6.49
Yield: 6.37%
A 10-year summary of Sales, Earnings Before Interest and Tax (EBIT), Earnings per share (EPS), yearly high and low stock price, corresponding high and low P/E (calculated by dividing the high and low price by the EPS for the year), and average P/E (average of high and low P/E) is shown below.
Key 10-year data for AstraZeneca
Year |
Sales (in Billions) |
EBIT (in Billions) |
EPS |
High Price |
Low Price |
High P/E |
Low P/E |
Average P/E |
2011 |
33.59 |
12.37 |
7.3 |
53 |
41 |
7.3 |
5.6 |
6.4 |
2010 |
33.27 |
10.98 |
5.57 |
53 |
41 |
9.5 |
7.4 |
8.4 |
2009 |
32.8 |
10.81 |
5.19 |
48 |
30 |
9.2 |
5.8 |
7.5 |
2008 |
31.6 |
8.68 |
4.2 |
50 |
34 |
11.9 |
8.1 |
10.0 |
2007 |
29.56 |
7.98 |
3.73 |
59 |
41 |
15.8 |
11.0 |
13.4 |
2006 |
26.48 |
8.54 |
3.85 |
67 |
45 |
17.4 |
11.7 |
14.5 |
2005 |
23.95 |
6.67 |
2.91 |
51 |
35 |
17.5 |
12.0 |
14.8 |
2004 |
21.43 |
4.84 |
1.76 |
50 |
36 |
28.4 |
20.5 |
24.4 |
2003 |
18.85 |
4.08 |
1.26 |
49 |
30 |
38.9 |
23.8 |
31.3 |
2002 |
17.84 |
4.04 |
1.33 |
52 |
29 |
39.1 |
21.8 |
30.5 |
2001 |
16.22 |
4.08 |
0.77 |
52 |
42 |
67.5 |
54.5 |
61.0 |
Source: Google Finance.
From these data, we can plot Sales, EBIT, and EPS versus Year, as shown in the chart below.
Sales (in Billions), EBIT (in Billions), and EPS versus Year for AstraZeneca, 2001-2011
As evident from the chart above, AZN has demonstrated very predictable sales and earnings over the past 10 years, which allows us to project EPS in the near future, say in the next ten years (i.e. Year 2021), using the regression equation EPS = 4.244E-184 * exp(0.211*2021) = 66.74. This projection assumes continuation of the 21.1 percent annual EPS growth that AstraZeneca has been able to generate for the past ten years; actual results may differ materially from this estimate.
How much will $66.74 projected EPS in 2021 be worth to us? That depends on what P/E the stock will trade at in 2021. A conservative average P/E estimate for the stock can be obtained as follows:
High P/E estimate: a conservative high P/E estimate can be calculated by averaging the five lowest High P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest High P/Es from the past 10 years gives 10.7.
Low P/E estimate: a conservative low P/E estimate can be calculated by averaging the five lowest Low P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest Low P/Es from the past 10 years gives 7.6.
Average P/E estimate: this takes the average of the High P/E estimate and the Low P/E estimate, as calculated above, to give a conservative estimate of an average P/E for the stock we can expect. Averaging 10.7 and 7.6 gives us 9.15.
Target Price
Multiplying our EPS projection by the average P/E estimate gives us a projected average price for the stock: $66.74 * 9.15 = $610.67, which represents a cumulative stock price return of 1289%, or an annual return of 30% from the current price = $43.96. When we add in the 6.37% dividend yield, the total return expected is 36% a year, which would be an extraordinary return.
Applying a discount rate of 10% (approximately the historical annual stock market return), our projected price of $610.67 in 10 years translates to a target price = $235 in today's dollars. This provides 81% margin of safety from the current price of $44, suggesting the stock is significantly undervalued right now. For a good margin of safety, investors are well advised to buy only if the current price is at least 20% below the target price.
AstraZeneca's P/E Compared with Competitors' P/Es
It is helpful also to compare AstraZeneca's valuations with those of its competitors. Current P/E and Forward P/E are tabulated below for the company and its main competitors.
Stock |
Current P/E |
Forward P/E |
AstraZeneca |
6.02 |
6.92 |
Amgen (NASDAQ:AMGN) |
16.15 |
10.63 |
Biogen Idec (NASDAQ:BIIB) |
26.03 |
18.93 |
Gilead Sciences (NASDAQ:GILD) |
15.03 |
12.05 |
Life Technologies (NASDAQ:LIFE) |
19.59 |
10.24 |
Teva Pharmaceutical (NASDAQ:TEVA) |
14.37 |
7.33 |
Watson Pharmaceuticals (WPI) |
35.08 |
10.85 |
Mylan (NASDAQ:MYL) |
16.32 |
7.8 |
Pfizer (NYSE:PFE) |
20.6 |
9.55 |
Johnson & Johnson (NYSE:JNJ) |
18.2 |
11.91 |
GlaxoSmithKline (NYSE:GSK) |
14.03 |
10.51 |
Sanofi (NYSE:SNY) |
18.64 |
9 |
Novartis (NYSE:NVS) |
14.38 |
9.83 |
Roche Holding (OTCQX:RHHBY) |
14.7 |
10.68 |
Abbott Laboratories (NYSE:ABT) |
19.97 |
11.6 |
Bristol-Myers Squibb (NYSE:BMY) |
15 |
17.25 |
Mean |
17.76 |
10.94 |
Median |
16.24 |
10.57 |
Source: finance.yahoo.com; money.msn.com
AstraZeneca sells at a significant discount compared to all its competitors listed above. Its current P/E is less than half the median P/E among all the competitors, and even its forward P/E, which is higher than its current P/E given lower expected earnings for the next year, is significantly lower than the median P/E of the group. Given the company's strong track record of earnings and increasing dividends, the current low valuation with P/E around 6, compared to much higher valuation 10 years ago with P/E around 60, appears to offer a great buying opportunity.
Risk Index
Lastly, we calculate the Risk Index, calculated as (Current Price - Forecast Low Price)/ (Potential High Price - Forecast Low Price) to give an estimate of the risk: reward ratio. Risk index less than 20% is desired, which gives us +200% potential returns for every risk of 50% loss we assume.
The Forecast Low Price is calculated by multiplying the Low P/E estimate by the Forecast Low EPS, to give a conservative estimate of low price for the stock in 10 years, assuming zero EPS growth and low valuation. Forecast Low EPS can be estimated by averaging the EPS over the past 5 years. For growth stocks with predictable earnings growth, EPS in 10 years should not be any lower than this conservative estimate. For AZN, the forecast low EPS is equal to $5.198. Applying the Low P/E estimate of 7.6 gives us a forecast low price of $39.34.
The Potential High Price is calculated by multiplying the High P/E estimate by the projected EPS in 10 years, giving us a price in 10 years, should the stock command a high P/E. For AZN, this equals 10.7 * 66.74 = $717.44.
Thus, the Risk Index = ($43.96 - $39.34) / ($717.44 - $39.34) = 0.77%. Since this is much below 20%, the stock has a favorable reward to risk ratio at the current price.
Conclusion
AstraZeneca, currently selling around $43.96, has a target price = $235, which provides significantly margin of safety. The stock is currently selling at decade low valuation, is selling at a significant discount compared to its competitors, and has a very favorable risk to reward ratio. The stock is a STRONG BUY at the current price.
Disclosure: I am long AZN, JNJ.
Disclaimer: Use this information as a starting point for your own due diligence, before buying any stock. If you do buy, be sure to read any annual reports (10-K) and quarterly reports (10-Q) to ensure that the fundamentals remain good and the stock is on target to reach its projected price. After holding for five years, repeat the analysis detailed in the article to decide whether to continue to hold, add, or reduce your position.