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How AstraZeneca plc (ADR) (AZN) Measures Up as a GARP Investment

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LONDON — A popular way to dig out reasonably priced stocks with robust growth potential is through the “Growth at a Reasonable Price,” or GARP, strategy. This theory uses the price-to-earnings to growth ratio to show how a share’s price weighs up in relation to its near-term growth prospects — a reading below 1 is generally considered decent value for money.

Today I am looking at AstraZeneca plc (ADR) (NYSE:AZN) to see how it measures up.

AstraZeneca plc (ADR) (NYSE:AZN)

What are AstraZeneca’s earnings expected to do?

2013 2014
EPS Growth -19% -5%
P/E Ratio 9.9 10.4
PEG Ratio n/a n/a

Source: Digital Look.

AstraZeneca plc (ADR) (NYSE:AZN) is expected to post further earnings declines both this year and next, following on from 2012’s 12% earnings per share drop.

As a consequence the pharma play does not offer a valid PEG rating during the next two years. The firm does, however, boast a price-to-earnings to growth ratio below the value benchmark of 10 for this year, although this is expected to edge above the threshold in 2014.

Does AstraZeneca provide decent value against its rivals?

FTSE 100 Pharmaceuticals & Biotechnology
Prospective P/E Ratio 16.9 76
Prospective PEG Ratio 4.7 2.5

Source: Digital Look.

Although AstraZeneca plc (ADR) (NYSE:AZN) cannot be compared with the average of its FTSE 100 and pharmaceuticals counterparts on a PEG basis, at face value the company does appear cheap in terms of its P/E rating.

Still, I believe that it is worth comparing the firm with GlaxoSmithKline plc (NYSE:GSK), as a cluster of firms distort the entire pharma sector’s readings. GlaxoSmithKline, which is expected to post EPS growth of 4% this year, carries a P/E rating of 14.5 and a PEG rating of 3.6. Although these metrics preclude GlaxoSmithKline plc (NYSE:GSK) from being considered a GARP stock, it has a decent product pipeline to deliver longer-term growth which AstraZeneca does not.

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