Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The Stock Picker’s Guide to AstraZeneca plc (AZN)

LONDON — Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.

In this series, I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety, and valuation. How does AstraZeneca plc (LON:AZN) measure up?

AstraZeneca plc (ADR) (NYSE:AZN)

1. Prospects
Despite aging populations in developed countries, and increasing wealth in developing ones, the pharmaceutical majors are losing ground to generic manufacturers. None are suffering from patent expirations more than AstraZeneca plc (LON:AZN). Things will get worse before they get better, with 45% of AstraZeneca plc (LON:AZN)’s sales depending on just three drugs, with major patent expirations due between 2014 and 2016.

New CEO Pascal Soriot’s strategy is to boost the pipeline of new drugs through improved R&D and acquisitions of biotech companies. Better marketing, improved penetration of emerging markets, and a big cost-cutting programme complete his turnaround plan.

2. Performance
Revenues and operating profits maintained a largely upwards path until patent expirations sent them crashing into reverse in 2012, with revenues down 15%, and core EPS down 9%. The trend has continued in Q1 2013, with the company expecting a “mid-to-high single digit” decline in revenues, and a significantly bigger fall in core EPS for the full year.

Dividend growth was maintained in 2012 at the expense of relaxing dividend cover, previously between 2.5 to 3 times, to just 2 times.

3. Management
A former veterinary surgeon who was COO of R&D-driven Roche, and CEO of biologicals business Genentech, Pascal Soriot has set a clear path for AstraZeneca plc (LON:AZN) as a science-led firm rather than diversifying, like rival GlaxoSmithKline plc (ADR) (NYSE:GSK). It’s a bold, if risky, strategy.

4. Safety
Astra faces the challenge of turnaround with a strong balance sheet. Net gearing is just 11%, with interest covered 11 times.

Tangible net assets are technically negative, but Astra’s patents and marketing rights have real value, so roughly 30% of market cap is backed by assets. A pension scheme deficit is not significant.

5. Valuation
On a prospective P/E of 9.4, AstraZeneca plc (LON:AZN) is trading at a 35% discount to FTSE 100 peers GlaxoSmithKline plc (ADR) (NYSE:GSK) and Shire.

Its yield has risen steadily over the past six years, doubling from sub 3%, to 5.8%. That suggests the share price is more and more supported by the dividend.

The management team has given themselves flexibility to maintain or increase the payout while new drugs come on stream, with a target of covering core earnings two times “over the investment cycle.” But if the pipeline doesn’t develop as hoped, the shares are trading on thin air.

Astra is basically a big biotech play — with a fat dividend to keep investors happy while they wait to see if the new science is successful.

One very successful investor who has kept faith is Invesco Perpetual’s star fund manager Neil Woodford. Nearly a quarter of his 22 billion pound funds are invested in just three companies in the pharmaceutical sector, including AstraZeneca plc (LON:AZN).

Mr Woodford has an unrivalled record for stock-picking. His high income fund is “the best performing of any fund investing in the U.K. since it launched” according to Hargreaves Lansdown.

The article The Stock Picker’s Guide to AstraZeneca originally appeared on and is written by Tony Reading.

Fool contributor Tony Reading owns shares of AstraZeneca and GSK, but no other companies mentioned in this article. The Motley Fool recommends GlaxoSmithKline.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!