Up 38% from its 12-month low, how does AstraZeneca's share price still look cheap?

AstraZeneca's (LSE: AZN) share price has fallen 38% from £94.60 in the 12 months to February 12. In the process, and in other media, it has become the first UK company with a market capitalization of £200bn+.

Many investors may see these numbers and assume that there will not be any value left in the stock. It's an understandable idea, but in my experience as an investment banker it's not necessarily true.

An increase in the company's stock price may be the result of it being fundamentally more valuable than before. The market may also be playing with the actual value of the company.

More importantly, the stock may be worth more than the new share price. This is the case with AstraZeneca, in my opinion.

What is the remaining value of the shares?

The pharma giant still trades near the bottom of its peer group on several key stock test metrics.

In the price-to-earnings (P/E) ratio, it is the second lowest at 40.7, more Merck at 21. The rest of the competing team includes Novo Nordisk at 45.3, AbbVie at 64.6, Eli Lilly in 113.1.

In terms of price-to-book (P/B) ratio, the UK firm is tied for the lowest with Merck at 6.6, compared to a peer group average of 38.6.

I didn't include its closest UK peer – GSK – in the group because of its very small size. But in comparison, it has a P/E of 16.1, a P/B of 4.5, and a P/S of 2.1.

In hard currency terms, the discounted cash flow analysis shows that AstraZeneca is worth 48% to its current price of £130.53.

Therefore, the fair value of the stock would be £251.02, although it could be lower or higher, of course.

Does the growth perspective support the valuation?

There are risks attached to every firm and AstraZeneca is no different. The main thing I see is the failure of any of its key products.

This can be very expensive to fix and may result in lawsuits for any adverse effects on the patient's health. It can seriously damage the reputation of the company.

That said, consensus analyst forecasts are for its earnings to grow 16.6% annually through the end of 2026. Earnings per share are expected to rise 17.7% year over year. And the return on equity is expected to be 29% during that period.

Profit growth is the ability to increase a company's share price (and profits) over time.

AstraZeneca's H1 2024 results released on 25 July showed total revenue jumped 18% to $25.617bn from H1 2023. This was driven by a 22% increase each in its cancer, CVRM (cardio and blood vessels, kidneys and metabolism), and respiratory and immunology businesses.

Should I buy more?

I have gradually built up my holdings in the company from very low levels, so I am happy with that position.

If I didn't have this, I would have no doubts at all about buying the stock at the current price and I would do so.

The stock still looks heavily discounted on all key stock metrics that I think reflect real value more accurately.