Just over £119 now, AstraZeneca’s share price looks cheap to me anywhere under £220.91

AstraZeneca’s (LSE: AZN) share price has dropped 11% from its 3 September 12-month traded high of £133.38.

Fears of additional US sanctions have weighed on it, as have concerns over ongoing investigations into its China business. Each remains a risk to the firm’s future earnings.

That said, I think June’s trade deal with the US reduces the chance of more tariffs being imposed on the UK’s firms. And even if they are, I do not believe that Washington’s current trade protectionism will continue too long after President Donald Trump’s current term.

China has released no further updates on its examination of AstraZeneca’s business there, which constitutes 13% of the firm’s revenues. As it was, the pharmaceutical giant said it had only received a notice for suspected unpaid importation taxes of $1.6m (£1.2m). It has also repeatedly stated that it has made no illegal gains in the country.  

Moreover, its 29 July H1 results showed that its sales in China over the period were up 4% to $3.515bn. In the same period last year, they were down 1%.

So, I wonder if now is the right time for me to buy more of the stock?

Are the shares undervalued?

My starting point in this price assessment is to compare AstraZeneca’s key valuations with those of its peers.

On the price-to-sales ratio, it is trading at 4.4 – bottom of the group of its competitors, which average 8.5.

These firms comprise Novo Nordisk at 5.1, AbbVie at 6.3, Pfizer at 10.3, and Eli Lilly at 12.4.

So it is very cheap on this basis.

The same is true of its 5.6 price-to-book ratio compared to its peer group’s average of 17.1.

And it is also the case with AstraZeneca’s price-to-earnings ratio of 30 against the 47.6 average of its competitors.

The second part of my price evaluation involves running a discounted cash flow analysis. This highlights where any firm’s share price should be trading, based on cash flow forecasts for the underlying business.

In AstraZeneca’s case, it shows the shares are 46% undervalued at their current £119.29 price.

Therefore, their fair value is £220.91.

Consequently, they look cheap to me anywhere under that level.

Does the firm’s performance support this view?

Its H1 results showed revenue increase 11% year on year to $28.045bn, driven by double-digit growth in Oncology and Biopharmaceuticals. Growth was seen across all major geographic regions, with the US leading the way on a 12% rise.

Operating profit leapt 24% to $7.182bn, while profit after tax soared 32% to $5.369bn. Earnings per share rose by the same percentage, to $3.46.

H1 also saw 12 positive key Phase III trial results, including for Baxdrostat, Gefurulimab, and Tagrisso. These are respectively aimed at treating hypertension, autoimmune disease, and lung cancer.

Cementing its links to the US, the firm also highlighted its recent plan to invest $50bn for growth there. This is part of its positioning to deliver $80 billion of revenue by 2030, against $54.073bn in 2024.

Will I buy more?

Consensus analysts’ forecasts are that AstraZeneca’s earnings will increase by 14.4% a year to end-2027.

It is ultimately this growth that powers any firm’s share price higher over time.

Given this, and their extreme undervaluation, I will buy more of the shares very shortly.

The post Just over £119 now, AstraZeneca’s share price looks cheap to me anywhere under £220.91 appeared first on The Motley Fool UK.

More reading

• After this weekend’s news, is it time to look again at the AstraZeneca share price?
• 1 no-brainer UK share to consider buying with £3,000?

Simon Watkins has positions in AstraZeneca Plc. The Motley Fool UK has recommended AstraZeneca Plc and Novo Nordisk. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts