Market commentary seems to have shifted a bit to focus on the political theater – both whether a second set of stimulus programs will be reached before the upcoming election, or speculation about the election itself. The unrelenting focus on COVID-19 vaccines up to now seems to have faded a bit, even though the pandemic continues to be a big driver of the political rhetoric. That means that some of the attention that has been centered on the companies involved in vaccine and antiviral treatments appears to have shifted, which is perhaps a reason that momentum in the Pharmaceutical industry is fading a bit.
Despite the short-term focus shift, I think this is an industry that is going to continue to dominate headlines moving into the end of the year and into 2021. Maybe that sounds obvious – but the truth is that no matter how much folks might be aching for a return to normal, pre-pandemic conditions, the development, approval, implementation and distribution is going to dictate when that might finally happen. 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 at the front of vaccine development. These are the companies who are seeing clinical trials moving into later stages, with some having already applied for emergency use authorization.
Normally a long, extended process due to regulatory constraints, vaccine development, all the way from early concept to final approval and broad-based distribution is an expensive undertaking. The urgency of the pandemic has prompted governments worldwide to reconsider the lengthy approvals process they normally enforce and to work with the industry to provide a way to clear regulatory hurdles so that vaccines can be distributed as quickly as possible. This is an important element to understand as an investor, because the ability to pivot quickly through that process is something that requires a company to have the resources, including manufacturing and distribution networks in place far more quickly than normal – which I believe is another reason the biggest companies in the industry are at the front of the pack.
Names like Pfizer (PFE), Johnson & Johnson (JNJ) and AstaZeneca (AZN) have been global leaders in the effort, as they have moved trials for their respective candidates into a more broadly expanded Phase 3 stage. These companies also included agreements with the U.S. government made over the summer to provide billions of doses of their vaccine candidates once final, expected approval is given. 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. 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 to take advantage of under current market conditions? 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 $135.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by nearly 30%, while revenues rose by 7.76%. In the last quarter, earnings shrank -9.43% while sales dropped -1.24%. Despite the negative earnings pattern in the last quarter, the company’s margin profile shows that operating profits are healthy and growing; over the last twelve months, Net Income was 8.36% of Revenues, and increased to 12.05% in the last quarter.
Free Cash Flow: AZN’s free cash flow is $2.8 billion over the last twelve months. That number marks an improvement from the last quarter at $1.5 billion and translates to a Free Cash Flow Yield of 2.09%.
Debt to Equity: AZN’s debt to equity is 1.11, which is high, but not unusual for stocks in this industry. The company’s balance sheet shows about $6.1 billion in cash and liquid assets in the last quarter – versus $4.26 billion in the quarter prior – compared to $15.1 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 2.71% 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 DKS at around $39 per share. That suggest that at the stock’s current price, AZN is significantly overvalued by -25% from from its current price. Its actual bargain price is around $31.
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. After dropping back off of that high in July, the stock gradually settled into a lower, sideways range between $53 at support and about $56.50 for resistance. In the last week, as industry momentum has turned a bit more bearish, the stock dropped below that support at $53, which now marks the stock’s new resistance. New support appears to be forming around $51.50, but if that doesn’t hold the stock could drop quickly to about $47 where the 61.8% Fibonacci line rests. A push above $53 will likely find strong next resistance between $56 and $56.50.
Near-term Keys: Looking only at the stock’s discount based on its valuation metrics means AZN is a clearly overvalued. While the stock’s fundamentals are generally solid, they don’t provide a compelling reason to believe the stock should be higher. That means the best probabilities with this stock come with short-term trades; you could use a break above $53 as a signal to buy the stock or work with call options, using a near-term price target at around $56 to take profits. If the stock drops below $51.50, consider shorting the stock or working with put options, using $47.50 as a good profit target on a bearish trade.