As the pace and progress of vaccinations across the country, and the world begins to increase, more and more commentary is starting to talk in practical terms about concepts like “herd immunity,” when a large enough portion of the population has built antibodies either by recovery from coronavirus or through vaccination itself. Most of the activities that we associate with the “old normal,” presumably will start to become more practical once that level is reached, which means things like social gatherings, travel, family vacations and so on will become more practical. Those are activities that, economically speaking also carry the potential for increased demand on sectors that have been hurt throughout the past year by the pandemic.
The Pharmaceutical industry in the Health Care sector has, naturally carried a lot of the market’s attention for the past year, and will continue to do so throughout the year. In the U.S., three vaccines have been approved and are now in distribution, with others still pending. Additional vaccines, beyond those that are already being administered are a positive thing, because it increases the availability of vaccines to larger and larger segments of the global population. That’s why I think a smart investor is going to continue to pay attention to some of the biggest and best-known names in the Pharmaceutical industry, who have all been hard at work in vaccine development.
Names like Pfizer (PFE), Moderna Inc. (MRNA), Johnson & Johnson (JNJ) and AstaZeneca (AZN) are just a few examples of companies that have led the way for the past year. These companies also included early agreements with the U.S. government made last summer to provide billions of doses of their vaccines. One of the interesting elements to consider as an investor, however is the difference in expectations these different companies have. PFE, for example, has openly stated that they expect to make money from their vaccine, while JNJ and AZN’s agreements with the U.S. and other governments stipulate providing their vaccines at cost while the health crisis persists, which means that any profitability in their respective treatments is more long-term in nature.
AZN is one of the world’s leading drug companies, and where COVID-19 is concerned, they have been running trials on their vaccine in multiple countries besides the U.S. so as to be able to distribute it as widely as possible once expected regulatory approvals are given. With PFE, MRNA and JNJ’s vaccines all now approved and being administered, that means that AZN is laggard in the U.S. It had been approved and was being used in the European Union, although recently more than a dozen countries in that part of the world suspended distribution over concerns about blood clotting. Medical reports suggest the clotting risk is no greater among vaccinated people that among the general population, but the question has nonetheless but a damper on the drug’s prospects and so also on AZN’s stock price.
The Pharmaceutical industry is intensely competitive and requires companies to rely on new emerging drugs to drive revenue growth as older drugs lose patent protections and give up market share to lower-cost generics. That’s another reason that larger companies like AZN tend to dominate the conversation when it comes to identifying fundamental strength in the industry. Do the company’s fundamental strengths, including improving profitability and a solid balance sheet also mean that the company offers a good value – possibly enough to overcome short-term concerns about its vaccine? Let’s find out.
Fundamental and Value Profile
AstraZeneca PLC is a biopharmaceutical company. It focuses on discovery and development of products, which are then manufactured, marketed and sold. It focuses on three main therapy areas: Oncology, Cardiovascular, Renal & Metabolic (CVRM) and Respiratory, while selectively pursuing therapies in Autoimmunity, Infection and Neuroscience. In CVRM, it is expanding its portfolio into the cardiovascular-renal area with roxadustat, as well as investing to explore the benefits of its SGLT2 and GLP-1 franchises in chronic kidney disease (CKD) and heart failure (HF). It has approximately 38 projects in Phase I, including 26 new molecular entities (NMEs), and 12 oncology combination projects. It has approximately 43 projects in Phase II, including 25 NMEs; six additional indications for projects that have reached phase II, and 12 oncology combination projects. It has approximately 22 projects in late-stage development, either in Phase III/pivotal Phase II studies or under regulatory review. AZN has a current market cap of about $131 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by nearly 20%, while revenues rose by a little more than 11%. In the last quarter, earnings grew almost 15% while sales increased by 12.65%. The company’s margin profile shows that operating profits are healthy and growing; over the last twelve months, Net Income was 12% of Revenues, and increased to 13.66% in the last quarter.
Free Cash Flow: AZN’s free cash flow is a little more than $3.9 billion over the last twelve months. That number marks an improvement from the last quarter at $3.5 billion and translates to a Free Cash Flow Yield of 3%.
Debt to Equity: AZN’s debt to equity is 1.12, which is high, but not unusual for stocks in this industry. The company’s balance sheet shows about $8.1 billion in cash and liquid assets in the last quarter – versus $4.26 billion a year ago – compared to $17.5 billion in long-term debt. The company’s healthy, strengthening operating profile indicates that servicing their debt isn’t a problem.
Dividend: AZN’s annual divided is $1.40 per share, which translates to a yield of about 2.8% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target for AZN at around $48 per share. That suggest that at the stock’s current price, AZN is overvalued by -8% from from its current price, with its actual bargain price at around $37.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red diagonal line traces the stock’s upward trend beginning in March to its peak in mid-July at $65. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Since dropping back off of that high in July, the stock has followed a gradual downward trend, following a consistent pattern of lower highs and lower lows. Immediate resistance is at around $50.50, with current support at around $47. A push above $50.50 could find next resistance at the 50% retracement line at $51.50, but if bullish momentum increases the stock could push to the 38.2% retracement line at around $54.50. A drop below $48 should see the stock find next support at around $46 based on its last pivot low earlier this month, with additional downside at around $44 based on pivot activity a year ago if bearish momentum increases.
Near-term Keys: Looking only at the stock’s discount based on its valuation metrics means AZN is a bit overvalued. While the stock’s fundamentals are solid, they don’t provide a compelling reason to believe the stock should be higher, especially in light of current momentum driven by unfavorable vaccine distribution news. That means the best probabilities with this stock come with short-term trades; you could use a break above $50.50 as a signal to buy the stock or work with call options, using a near-term price target at around $54.50 to take profits. If the stock drops below $48, consider shorting the stock or working with put options, using $46 to $44 as a good profit target on a bearish trade.