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On 13 August, AstraZeneca’s (LSE: AZN) share price had risen so much that the firm became the UK’s first listing with a market capitalisation of £200bn. And on 3 September, the pharmaceutical giant hit a 12-month traded high of £133.38.
Just 14 weeks on, the share price has dropped 20%.
As a former investment bank trader, I have long known how fickle the markets can be. As a private investor nowadays, I know that they can provide extraordinary buying opportunities.
So, is AstraZeneca one of these right now?
Why have the shares tumbled?
The key reason behind the fall were rumours, later confirmed, that Chinese authorities are investigating AstraZeneca’s operations in the country.
The firm recently stated that the investigations include allegations of medical insurance fraud, illegal drug importation and personal information breaches.
In H1 2024, 13% of the company’s revenue came from China – totalling $3.378bn (£2.66bn). So any outcome of China’s investigations that threaten its income is a significant risk for the firm. Another risk for it is any failure in one of its core products that would be very costly to fix.
However, its Chinese operations are ongoing under the firm’s national general manager. And its long-term financial forecasts remain in place.
Recent results and long-term projections
Indeed, in its nine-month and Q3 results released on 12 November it increased key guidance, for this year at least.
Total revenue is now expected to increase by a high-teens percentage (from the mid-teens previously). And core earnings per share (EPS) are also now forecast to rise by a high-teens percentage (from the mid-teens).
These guidance upgrades came on the back of a 19% year-on-year increase over the nine months – to $39.182bn (£30.74bn). Core EPS jumped 11% to $6.12.
Longer term, AstraZeneca still forecasts $80bn+ in revenues by 2030, against $45.8bn at the end of 2023.
Consensus analysts’ estimates are that its earnings will grow 18.2% a year to the end of 2026.
How does the share valuation look?
On the price-to-earnings key stock valuation measure, AstraZeneca trades at 31.8. This is bottom of its competitor group, which averages 56.7. So, it looks a major bargain on this basis.
The same is true for its price-to-book valuation of just 5.1 against a competitor average of 34.8.
And it is also the case with its bottom-ranked price-to-sales valuation of only 4 compared to its peers’ average of 11.9.
To put these into the context of share price, I ran a discounted cash flow (DCF) analysis. This shows the stock is 53% undervalued at its current price of £106.80.
Therefore, the fair value for the shares is £227.23, although they may trade lower or higher than that.
Will I buy the stock?
I bought AstraZeneca shares several times in the past few years at various prices, so I have a good position. That said, the price now compared to where I think it will be in a few years is too tempting for me to miss.
I do not expect significant damage to the firm’s China business to result from the ongoing investigations. But even if there is, I think AstraZeneca is more than able to compensate through growth elsewhere over time.
So, I will be adding to my holding very soon.
