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I am always scanning the UK stock market for value and sometimes find that the biggest companies on the market are trading at a much lower price than expected. Recently, I took a closer look at pharmaceutical giant AstraZeneca (LSE:AZN), a FTSE 100 Index heavyweight.
In a difficult period
Shares are experiencing the most significant weekly drop since July 2023. This is primarily due to disappointing results from a late-stage trial of an experimental lung cancer drug developed in partnership with Daiichi SankyoThis setback has led some analysts to downgrade the stock to “sell.”
However, savvy investors know that it is crucial to look beyond short-term volatility and consider the broader financial picture and long-term prospects. The company’s latest financial report reveals annual revenues of £37.45 billion and profits of £4.91 billion. Of particular note is the company’s impressive gross margin of 82.62%, which demonstrates the company’s ability to maintain impressive profits in a competitive industry.
However, for me the valuation is the most interesting part. Based on a discounted cash flow (DCF) calculation, the stock is trading about 51% below the estimated fair value. This significant discount suggests that the market may be undervaluing the company, possibly due to an overreaction to recent news. However, such an estimate may be more of an art than a science, and it's possible that the market is simply reflecting a lot of uncertainty.
Of course, it's important to acknowledge the risks. The company has a substantial debt load. There are also numerous challenges on the horizon, including the impending expiration of the U.S. patent on its blockbuster drug. the joy and price pressures in the Chinese market. These factors undoubtedly contribute to the current negative sentiment around stocks.
Reasons for optimism
Under the leadership of CEO Pascal Soriot, the company has successfully transformed itself into a leader in oncology and rare diseases. In addition, the firm has a strong pipeline of potential blockbuster drugs that could drive future growth and help offset current setbacks.
Growth prospects are particularly noteworthy. Analysts are forecasting earnings growth of 16% annually, a figure that beats many competitors and the broader market average. This trajectory suggests that the company is quite well positioned to meet current challenges and emerge stronger.
The stock offers a dividend yield of 1.9%. Obviously, this is far from the highest yield in the FTSE 100. However, the company's conservative payout ratio of 71% indicates there is plenty of scope for future dividend growth as earnings rise.
One for the future
While AstraZeneca certainly faces some issues, the current share price may represent an attractive opportunity for long-term investors. The company’s strong fundamentals, diverse product portfolio, and promising pipeline suggest it is well equipped to weather the current storm.
The pharmaceutical industry is known for its volatility, and even established companies like AstraZeneca are not immune to occasional setbacks. However, as an investor with a long-term perspective and tolerance for some short-term uncertainty, I view the current situation as an opportunity hiding in plain sight and will buy the stock at the next opportunity.
