- AZN’s free cash flow is $1.5 billion over the last twelve months.
- That number translates to a Free Cash Flow Yield of 1.72%.
- AZN’s debt to equity is 1.32, which is high, but not unusual for stocks in this industry.
The market seems intent on rebounding from last week’s break in bullish momentum, with the major indices at the beginning of a new week all moving higher. That looks like another sign that investors generally want to emphasize the positive and be hopeful. Indications over the weekend that the federal government could approve a second wave of stimulus spending in August seem to be providing some lift, with positive news on the COVID-19 vaccine front in the last week providing an additional push.
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It isn’t too surprising to see that most of the biggest and best-known names in the Pharmaceutical industry are all at the front of vaccine development – or that those are the companies that seem to be in the best position right now to see their vaccine candidates go from promising trial results to fast-track approval status. Normally a long, extended process due to regulatory constraints, vaccine development, all the way from early concept to final approval and broad-based distribution is an expensive undertaking. The urgency of the pandemic is prompting governments worldwide to reconsider the lengthy approvals process they normally enforce and working with the industry to provide a way to clear regulatory hurdles so that vaccines can be distributed as quickly as possible. The truth is that the ability to pivot quickly through that process is something that requires a company to have the resources, including manufacturing and distribution networks in place far more quickly than normal – which I believe is another reason the biggest companies in the industry are at the front of the pack.
In the last week or so names like Pfizer (PFE), Johnson & Johnson (JNJ) and AstaZeneca (AZN) have made news, not only from encouraging results from Phase 2 trials but also of progress as they begin moving into more broadly expanded Phase 3 trials. For these companies, that progress includes agreements with the U.S. government to provide billions of doses of their vaccine candidates once final, expected approval is given. One of the interesting elements to consider as an investor, however is the difference in expectations these different companies have. PFE, for example, has openly stated that they expect to make money from their vaccine, while JNJ and AZN’s agreements with the U.S. and other governments stipulate providing their vaccines at cost while the health crisis persists, which means that any profitability in their respective treatments is more long-term in nature.
AZN is one of the world’s leading drug companies, and where COVID-19 is concerned, they are running trials on their vaccine in multiple countries besides the U.S. so as to be able to distribute it as widely as possible once expected regulatory approvals are given. The Pharmaceutical industry is intensely competitive and requires companies to rely on new emerging drugs to drive revenue growth as older drugs lose patent protections and give up market share to lower-cost generics. That’s another reason that larger companies like AZN tend to dominate the conversation when it comes to identifying fundamental strength in the industry. Do the company’s fundamental strengths, including improving profitability and a solid balance sheet also mean that company offers a good value to take advantage of under current market conditions? Let’s find out.
Fundamental and Value Profile
AstraZeneca PLC is a biopharmaceutical company. It focuses on discovery and development of products, which are then manufactured, marketed and sold. It focuses on three main therapy areas: Oncology, Cardiovascular, Renal & Metabolic (CVRM) and Respiratory, while selectively pursuing therapies in Autoimmunity, Infection and Neuroscience. In CVRM, it is expanding its portfolio into the cardiovascular-renal area with roxadustat, as well as investing to explore the benefits of its SGLT2 and GLP-1 franchises in chronic kidney disease (CKD) and heart failure (HF). It has approximately 38 projects in Phase I, including 26 new molecular entities (NMEs), and 12 oncology combination projects. It has approximately 43 projects in Phase II, including 25 NMEs; six additional indications for projects that have reached phase II, and 12 oncology combination projects. It has approximately 22 projects in late-stage development, either in Phase III/pivotal Phase II studies or under regulatory review. AZN has a current market cap of about $148.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 17.78%, while revenues rose by 15.72%. In the last quarter, earnings also grew 17.78% while sales dropped -4.65%. The company’s margin profile shows that operating profits are healthy, and growing; over the last twelve months, Net Income was a little over 6% of Revenues, and increased to 12.28% in the last quarter.
Free Cash Flow: AZN’s free cash flow is $1.5 billion over the last twelve months. That number translates to a Free Cash Flow Yield of 1.72%.
Debt to Equity: AZN’s debt to equity is 1.32, which is high, but not unusual for stocks in this industry. The company’s balance sheet shows about $4.26 billion in cash and liquid assets in the last quarter compared to $15.6 billion in long-term debt. The company’s healthy, strengthening operating profile indicates that servicing their debt isn’t a problem.
Dividend: AZN’s annual divided is $1.40 per share, which translates to a yield of about 2.51% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target for DKS at around $53.50 per share. That suggest that at the stock’s current price, it is just a bit overvalued, by about -5% from from its current price.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red diagonal line traces the stock’s upward trend beginning in March to its peak earlier this month at $65. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock had been consolidating between $55 and $52 until the middle of this month, which is around when some of the initial positive news about AZN’s vaccine trials began to be made public. That provide a quick push to the stock’s peak at $65, but the market has since sold the stock sharply back to a little above its recent consolidation range. If the stock drops back below $54, where current support should be based on the 38.2% retracement line, the stock should fall back to about $52 at least, with most likely support around $50.55 where the 50% retracement line rests. If the stock can use $54 to $55 as a support point and rally higher, it has short-term upside to a little below $63 as an initial target based on its closing price on its peak day, and additional room to about $65 if bullish momentum persists.
Near-term Keys: Looking only at the stock’s discount based on its valuation metrics means AZN is a bit overvalued. While the stock’s fundamentals are generally solid, they don’t really provide a compelling reason to believe the stock should be higher. That means the best probabilities with this stock come with short-term trades; use a pivot and move higher from anywhere between $54 and $55 as a good sign the stock could pick up bullish momentum, which good be a signal to buy the stock or work with call options, using a top-end price target at around $63 to take profits. If the stock drops below $54, consider shorting the stock or working with put options, using $50.50 as a good profit target on a bearish trade.
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