The AstraZeneca (LSE: AZN) share price has done well in 2024, and it’s up 80% in five years.
So why, a day before H1 results are due on 25 July, do I think we might still be at the start of a bull run that could go on for a decade or more?
Valuation
The valuation, to be fair, doesn’t exactly make the stock look screaming cheap. The shares are trading at around 35 times last year’s earnings. And even with earnings growth on the cards, we’d still be looking at a price-to-earnings (P/E) ratio of 28 for the current year. That’s around twice the long-term FTSE 100 average.
And it doesn’t look like we’re going to get rich on the AstraZeneca dividend. Not with a forecast yield of just 1.8%. But that P/E looks low compared to the valuations of some industry peers. Most of those are listed in the US though, where stocks are typically valued on higher multiples.
Still, forecasts would drop the P/E to around 20 by the end of 2026, less than two years away. If the earnings growth trajectory can continue as it’s doing beyond that, the shares could soon look too cheap.
Cash and debt
AstraZeneca’s been on a decade-long programme of building up its drugs pipeline, which takes a huge investment.
And that can saddle a company with a lot of debt. At the end of Q1 (31 March), net debt stood at $26.4bn (£20.5bn). That’s maybe not much for a company with a £190bn market-cap and total 2023 revenue of $45.8bn (£35.5bn).
But I do like what I see when I look at cash flow and debt forecasts. They show free cash flow rising by 55% between 2023 and 2026. And they suggest net debt could drop by 67% in the same timescale.
Pipeline delivering
When Pascal Soriot took the helm in 2012, the company was in a bad way. Blockbuster patents were expiring and generic manufacturers were making all the money.
It was always going to be a decade-plus job to get the research machine back into motion.
At Q1 time, Soriot said: “Our strong pipeline momentum continued and already this year we announced positive trial results for Imfinzi and Tagrisso that were unprecedented in lung cancer […] We are also looking forward to seeing the results of several other important trials throughout the year.”
Pipeline back to speed? Looks like job done.
What next?
I don’t expect anything dramatic from the H1 figures, but just reiterating full-year guidance might be enough to boost the shares further.
For the long term? Drugs results have been good so far. But it might only take one or two costly failures to drag the profit outlook back down again.
On valuation, I see AstraZeneca as cheap compared to the industry and I think we could be in for good spell. But others will rate it as expensive compared to the FTSE 100. Either way, I’m looking forward to the update.
This post was originally published on Motley Fool
