AstraZeneca: The Price Upside Is Exhausted For Now (Rating Downgrade) (NASDAQ:AZN)

Robert Way Since I last wrote about the UK based pharmaceuticals company AstraZeneca (NASDAQ:AZN) in March, its price is up by a significant 18.4%. Even at that time it was more than obvious that the stock is due an uptick this year. Even the article itself was titled “5 Reasons AstraZeneca Stock Can Rise In 2024”, which were as follows: After its better than expected results in 2023, the revenue guidance for this year was particularly healthy. Similarly, core EPS outperformance was observed, leading to a robust outlook for 2024. A spate of approvals, including in its big US market added to optimism on the AstraZeneca stock. A higher trailing twelve months [TTM] dividend yield than the average for the healthcare sector. And while it was still low compared to some pharmaceuticals’ peers, over time, it the dividends had added substantially to total returns from the stock. The market multiples were attractive too, with a forward non-GAAP P/E of 16.3x, lower than the 19.7x for the healthcare sector. So far, so good. But here’s the catch. With the price rise in the past quarter, much of the upside has been exhausted. According to my estimates for AstraZeneca’s non-GAAP forward EPS, the forward P/E is now at 19.4x. Meanwhile, the healthcare sector’s P/E has declined to 19.2x. It’s also trading higher than its own five year average of 19x. The question now is, is there still a Buy case for the stock in 2024? Remarkable results encourage optimism The company’s first quarter results were certainly remarkable, resulting in a 5.4% price increase, the biggest single day rise seen in the past year. The company’s total revenues grew by a massive 19% year-on-year (YoY) at constant exchange rates [CER], on account of superior growth in its oncology and CVRM (Cardiovascular, Renal and Metabolism) divisions. The figure is higher than the “low double-digit to low teens percentage” growth expected for the full year 2024. Source: AstraZeneca The core earnings per share [EPS] number grew by 13% at CER, which at the higher end of its “low double-digit to low-teens percentage” growth guidance. Interestingly, the company mentions that core EPS growth was slower than revenue growth primarily due to a high base in Q1 2023. The base was elevated by a one-time gain of USD 241 million from the sale of the US rights of its asthma treatment Pulmicort Flexhaler last year. If that impact is excluded from the core EPS figure for Q1 2023, the number would have risen by 16.7% this quarter. Approvals and acquisitions The company’s progress on approvals is encouraging too. Most notably, Farxiga has now been approved for Type 2 diabetes treatment in the US. It was earlier approved of only in addition to diet and exercise. This sounds like a promising development for AstraZeneca considering: Farxiga is the single biggest revenue generator for the company, with a 15% share The US is the biggest market for the company, bringing in 40% of the revenues. Closely related to the obesity epidemic in the country, diabetes is a big health challenge for the US. Almost one in every 10 people in the US suffer from diabetes and ~30% of those aged over 65. In another notable development, AstraZeneca acquired Fusion Pharmaceuticals, a clinical-stage company developing radiotherapy treatments. This goes to support the company’s fast growing Oncology segment, which contributed to 40% of the revenues in Q1 2024. The total cost of acquisition would be a maximum of USD 2.4 billion, which amounts to 40% of the company’s post-tax profits in 2023. The downside of acquisition and forecasts With the acquisition, AstraZeneca’s earnings can be impacted going forward. In 2023, Fusion Pharmaceuticals reported a USD 1.45 loss per share, which is a notable 38% of AstraZeneca’s reported EPS in the year and 20% of its core EPS. This can explain why it has kept its earnings guidance unchanged so far. In addition to this, it has also revealed its revenue target of USD 80 billion by 2030, which represents a compounded annual growth rate [CAGR] of 8.3% from 2023. While this isn’t a bad number at all compared to the CAGR of 6.3% seen over the past numbers, it is still lower than the current growth rates. In other words, it indicates potential growth softening from the present levels going forward. Upgraded outcomes don’t move improve P/E However, for now, I’ve also considered what the outcomes for the AstraZeneca stock can be if its core EPS growth were to rise instead, going by the background for the Q1 2024 figures. These estimates assume that for the remaining three quarters of the year, the figure grows at 16.7%, the same as it would have been in Q1 2024 if it weren’t for a superior base. This results in an EPS figure of USD 8.3, which is 2.35% higher than my earlier estimate. The forward P/E doesn’t change significantly as a result, though, coming in at 19.2x. It is more in line with the healthcare average and closer to the stock’s five-year average, though. The key point here, is that even with an upgraded guidance, AZN still looks fairly valued at best. Dividend increase With the stock price unlikely to go anywhere fast for much longer, then, the attention turns to dividends. The company recently increased its annual dividend by 7% to USD 3.1 per share. This brings the forward dividend yield to 1.95%. This isn’t very much, but it is higher than the TTM yield of 1.82% and also the healthcare sector average forward yield of 1.46%. 5y Yield on Cost, AZN (Source: Seeking Alpha) There are of course stocks within the healthcare set, like Bristol-Myers Squibb (BMY), with a much higher dividend yield. And it’s a promising stock in its own right, to be sure. But a look at the yield on cost reveals that over time investors in AZN have been almost as well placed in terms of dividend income. Over the past five years, the yield on cost for AZN is at 4.9% compared to 5.1% for BMY, as AZN’s price has risen while BMY’s has fallen. Looked at another way, total returns on AZN are a much bigger 125.8% compared to just 3.6%, which has seen price weakness. What next? In conclusion, while there’s no denying the AstraZeneca is still a strong stock, the downside is hard to miss too. On the positive aspects, its latest numbers are exceptionally healthy and continued approvals go in its favour. The dividend increase adds a nice touch for investors too. However, much of the upside indicated the last I checked has been exhausted. In fact, its latest acquisition of Fusion Pharmaceuticals can be a drag on the earnings number going forward. Even then, if a guidance upgrade were to happen going by its recent robust figures, the market multiples don’t become competitive. Its long-term growth outlook isn’t robust enough to indicate further upside for now either. At least for the remainder of the year, it’s hard to make a Buy case for AstraZeneca. I’m downgrading it to Hold. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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