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I regularly scan the UK stock market for value, and from time to time I find that the biggest companies on the market are trading at a much lower price than expected. I recently took a closer look at the pharmaceutical giant AstraZeneca (LSE: AZN), a FTSE 100 heavy weight.
In a difficult time
Shares have experienced the biggest weekly decline since July 2023. This is due to disappointing results from the latest study of an experimental lung cancer drug developed by the company Daiichi Sankyo. This pullback prompted some analysts to downgrade the stock to 'sell'.
However, smart investors know that it is important to look beyond short-term volatility and consider the broader financial picture and long-term prospects. The company's latest financial report reveals annual revenues of £37.45bn and profits of £4.91bn. Particularly noteworthy is the company's impressive cash flow ratio of 82.62%, which demonstrates the company's ability to maintain impressive profitability in a competitive industry.
For me though, the measurement is the most interesting part. According to discounted cash flow (DCF) calculations, shares are trading at about 51% below their estimated market value. This significant discount suggests that the market may be underestimating the company, perhaps due to an overreaction to recent news. Such a measurement would be more art than science, and it is possible that the market simply reflects too much uncertainty.
Therefore, it is important to accept the risk. The company carries a huge debt burden. There are also many challenges on the horizon, including the expiration of the US patent for its blockbuster drug Farxiga and price pressures in the Chinese market. These factors undoubtedly contribute to the current negative sentiment surrounding stocks.
Reasons for optimism
Under the leadership of CEO Pascal Soriot, the company has successfully transformed itself into a leader in oncology and rare diseases. In addition, the company has a strong pipeline of drugs that could drive future growth and help address current issues.
The growth prospects are particularly noteworthy. Analysts are forecasting 16% annual earnings growth, which is outpacing many peers and the broader market average. This trend suggests that the company is well positioned to face current challenges and emerge stronger.
paid a dividend of 1.9 %. Obviously this is far from the highest yield in the FTSE 100. However, the company's conservative payout ratio of 71% shows great room for future dividend growth as dividends grow.
One for the future
So while AstraZeneca is facing a few headwinds, the current share price may represent an attractive opportunity for long-term investors. The company's strong fundamentals, diverse product portfolio, and promising pipeline suggest it is well-equipped to weather its current storm.
The pharmaceutical industry is known for its volatility, and even well-established companies like AstraZeneca are not immune to the occasional setback. However, as an investor with a long-term view and tolerance for some near-term uncertainty, I view the current situation as an opportunity in plain sight, and will be buying stocks at the next opportunity.
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