AstraZeneca: Buy This Big Pharma Stock At A Discount Now

seekingalpha09-24

AstraZeneca possesses all the key qualities of a qualitative dividend stock.The company topped the analyst consensus for net revenue and matched the analyst consensus for core EPS in Q2.AstraZeneca ...

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A researcher works in a lab. gorodenkoff In my investing career, I have learned that quality is just as important of a consideration as valuation. The simultaneous presence of high-quality and a reasonable/discounted valuation usually bodes well for investment performance. My idea of quality encompasses the following characteristics:  Steady earnings growth and an encouraging future outlook. A consistent and well-covered payout to shareholders. An investment-grade balance sheet.  AstraZeneca (NASDAQ:AZN) is a business that I believe offers a mix of quality and value. When I last covered it with a buy rating in April, I liked its impressive drug portfolio and pipeline. I also appreciated AZN's A-rated balance sheet. The valuation was also attractive. After sharing its second quarter results, I am maintaining my buy rating toward AZN. The company's double-digit annual core EPS growth prospects remain intact. AZN's net debt-to-adjusted EBITDA ratio improved sequentially. The drugmaker's free cash flow is comfortably covering its dividend. Lastly, AZN's valuation remains appealing. A Bright Future Ahead   AstraZeneca Q2 2024 Earnings Press Release On July 25th, AZN released its financial results for the second quarter ended June 30th. The company's total revenue grew by 13.3% over the year-ago period to $12.9 billion in the quarter. For perspective, this was $410 million above Seeking Alpha's analyst consensus during the quarter. Adjusting for unfavorable foreign currency translation to the tune of 4%, AZN's topline would have risen by 17% for the second quarter. Just like in the first quarter, the company's topline growth was due to all-around strong results throughout most of its businesses. That strength was again led by oncology. The plurality of total revenue in the second quarter (41.2%) came from this therapy area. The oncology therapy area posted $5.3 billion in total revenue during the second quarter. This was a 15% year-over-year growth rate. That was mostly due to greater demand for Tagrisso in adjuvant and first-line settings, improved market share from Imfinzi, and new patient starts for front-line chronic lymphocytic leukemia for Calquence. In the CVRM therapy area, total revenue surged 18% over the year-ago period to $3.2 billion for the second quarter. This was made possible by rapid Farxiga volume growth and continued sales growth from Brilinta and Crestor. The R&I therapy area reported $1.9 billion in total revenue in the second quarter, which was a 23% year-over-year growth rate. That was fueled by prescription growth for the company and Amgen's (AMGN) Tezspire, global market leadership for Symbicort, and the U.S. launch of Airsupra. In the Rare Disease therapy area, AZN's total revenue grew by 10% to $2.1 billion during the second quarter. Increased use in neurology and geographic expansion for Ultomiris offset declining volumes from Soliris. Growth in these therapy areas more than made up for a 57% plunge in V&I therapy area revenue to $119 million for the second quarter. Other medicines revenue dipped by 11% to $276 million in the quarter. AZN's core EPS fell by 8% over the year-ago period to $0.99 during the quarter. This was in line with the Seeking Alpha analyst consensus for the quarter. Backing out foreign currency translation headwinds, the company's currency-neutral core EPS decreased by 3%. That decline in core EPS was because of a $712 million gain in updates to contractual arrangements for Beyfortus in Q2, 2023. AZN's first-half results prompted it to up its total revenue growth guidance from a low double-digit to low teens rate for 2024 to a mid-teens rate. The company also anticipates that core EPS will rise by a mid-teens percentage, which is up from the previous range of a low double-digit to low teens rate. The FAST Graphs analyst consensus is that core EPS will climb by 12.5% to $4.09 in 2024. Beyond this year, the FAST Graphs analyst consensus is that core EPS will jump by 14.6% in 2025 to $4.68. Another 10.3% growth in core EPS to $5.16 is expected in 2026. These optimistic growth estimates are based on the 189 projects that were in AZN's pipeline as of July 25th. This has the company confident that it can have 25 or more blockbuster products by 2030.   AstraZeneca Q2 2024 Earnings Presentation AZN's balance sheet is also impressive. The company's net debt-to-adjusted EBITDA ratio improved from 1.9 in Q1 2024 to 1.8 in Q2 2024. Net debt remained relatively flat at just over $26 billion. An uptick in adjusted EBITDA to $14.3 billion is what made the deleveraging possible during the quarter. This leverage ratio explains why S&P awards an A+ credit rating to AZN on a stable outlook (unless otherwise sourced or hyperlinked, all details in this subhead were according to AZN's Q2 2024 Earnings Press Release and AZN's Q2 2024 Earnings Presentation). Fair Value Has Topped $85 A Share   FAST Graphs, FactSet Since my previous article, shares of AZN have gained 2% versus the 12% gains of the S&P 500 index (SP500). This makes the stock an intriguing buy here. AZN's current-year P/E ratio of 18.9 is about in line with the 10-year normal P/E ratio of 18.8 per FAST Graphs. The company's valuation multiple in the high teens can be justified in my view. That's because AZN's 12.4% forward annual core EPS growth consensus through 2026 is much better than its 10-year average of approximately 7%. Put another way, AZN is currently priced for high single-digit annual core EPS growth. Any growth above that level could even support a valuation multiple a bit higher. This leaves the valuation with a respectable margin of safety in my opinion. The calendar year 2024 will be 75% complete after this week. That means another 25% of 2024 and 75% of 2025 lies ahead in the coming 12 months. This is how I get a forward 12-month core EPS input of $4.53. Plugging that in with my fair value multiple of 18.8, I arrive at a fair value of $85 a share. Against the current $77 share price (as of September 23rd, 2024), this is a 9% discount to fair value. If AZN matches the growth consensus and returns to fair value, it could deliver 28% cumulative total returns through 2026. Core EPS And Free Cash Flow To Support The Dividend   The Dividend Kings' Zen Research Terminal AZN's 1.9% forward dividend yield is better than the healthcare sector median forward yield of 1.4%. That's sufficient for a B- grade for forward dividend yield and a B- grade for overall dividend yield from Seeking Alpha's Quant System. AZN's payout is also quite safe by a couple of measures. For one, the company's EPS payout ratio is poised to register in the high 30% range in 2024. That is below the 60% EPS payout ratio that rating agencies desire from the industry, per The Dividend Kings' Zen Research Terminal. Secondly, AZN generated $4.8 billion in free cash flow in the first half of 2024. Compared to the $3.1 billion in dividends paid in that time, this equates to a free cash flow payout ratio of 63.2%. For context, free cash flow has grown by 8.2% over the year-ago period. Regulatory approvals led to double-digit operating cash flow growth in the first half. This was only partially offset by a near doubling in net capital expenditures to $746 million. This capex is being devoted to projects such as:  An active pharmaceutical ingredient facility in Ireland. A cell therapy manufacturing site in Rockville, Maryland. An inhaled manufacturing site in Qingdao, China. An antibody-drug conjugate manufacturing site in Singapore.  Over time, it's sensible to conclude that these investments can support rising demand for its drugs. That should keep pushing operating cash flow and free cash flow higher, which can fuel modest dividend growth in the years ahead. Risks To Consider AZN is a top-notch company, but there are still risks to the investment thesis. One key risk is litigation risk. If the company loses any significant litigation, this could result in multi-billion-dollar product settlements. That could undermine the strength of the balance sheet and hurt its reputation among healthcare providers. Additionally, intellectual property lawsuits brought forth by industry counterparts could also damage the fundamentals by hurting AZN's competitive position. As I noted in my previous article, another notable risk is the potential for substantial regulatory changes to be enacted in major growth markets. If this happens, that could harm AZN's profit margins and growth story. Operationally, the company is a frequent target of attempted cyber breaches. If any were successful, this could compromise AZN's proprietary data like intellectual property. That could chip away at the company's competitiveness. Another risk that I outlined in my prior article was the possibility that AZN's extensive pipeline doesn't yield the expected results commercially. That could weigh on growth prospects and force a pivot in the company's growth strategy to more M&A. Summary: A Compelling Buy Right Now Thanks to a continued commitment to addressing clinical needs that are under met, AZN is on pace to deliver more than two dozen blockbusters to the market in the medium term. This is expected to translate into reliable double-digit annual core EPS growth over that time. So, AZN is a pharmaceutical with one of the most promising growth stories in the industry. The company's leverage ratio is sub-2 and continues to get better with time. That's behind one of the strongest credit ratings in the industry, with an A+ credit rating from S&P. Not to mention that the dividend is easily covered by both core EPS and free cash flow. This implies the market-beating dividend can keep moving higher in the years ahead.  Best of all, AZN's valuation is a solid value. Thus, I believe 11% annual total returns are a relatively high likelihood in the next couple of years. This backs up my buy rating.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2469467402"}