5 Reasons AstraZeneca Could Skyrocket: Is It the Ultimate GARP Investment?

Stocks

Stock	Price	52 Week Range	Marketcap	EPS	Dividend Yield	Chart (24H)	Sector	Employees	Last Updated
Astrazeneca PLC AZN	$79.12		245.31B	2.66	1.98%		Healthcare	94,300	17 hours ago
GSK plc GSK	$39.07		78.75B	2.24	4.22%		Healthcare	68,629	17 hours ago

At Market Monitors, we’re always on the hunt for stocks that provide a balanced mix of growth and value—a strategy known as Growth at a Reasonable Price (GARP). Today, we’re diving deep into AstraZeneca (AZN) to see if it fits the GARP bill amidst a challenging landscape of declining earnings and patent expirations. We’re going to compare AstraZeneca’s financial ratios with sector benchmarks and its peer GlaxoSmithKline (GSK) to help you decide if it’s a smart addition to a balanced portfolio.

What is GARP?

Growth at a Reasonable Price (GARP) is an investment strategy that merges the adrenaline of growth investing with the safety net of value investing. A key metric for GARP investors is the Price-to-Earnings Growth (PEG) ratio, which gives a more nuanced view than the plain Price-to-Earnings (P/E) ratio by taking expected earnings growth rates into account. Generally, a PEG ratio below 1 indicates a stock may be undervalued relative to its growth potential.

AstraZeneca: Challenges and Opportunities

Astrazeneca PLC

AZN

$79.12

0%

Editor's Note: Analysis and insight for this article were originally sourced from our friends at Fool.com 

AstraZeneca (AZN): Struggling but Worth the Risk?

AstraZeneca has hit a rough patch, with alarming declines in earnings. The Earnings Per Share (EPS) dropped 12% in 2012, and projections suggest a continuation of this downtrend with a 19% decline in 2013 and another 5% dip in 2014. Such sustained downward trends raise serious questions about AstraZeneca’s viability as a growth stock within a GARP framework.

AstraZeneca (AZN): Can Financial Ratios Justify the Risk?

Let’s break down AstraZeneca’s financial ratios. The company’s P/E ratio for the current year is under 10, which on the surface suggests it might be undervalued. However, expectations indicate that the P/E will slightly surpass this benchmark next year to 10.4. The bigger issue here is that negative growth projections make it impossible to calculate a valid PEG ratio, critically accentuating the risks involved.

Despite these growth concerns, AstraZeneca’s lower P/E ratio does make it a relatively cheaper option in the pharmaceuticals sector. The FTSE 100 average P/E ratio stands at 16.9, and compared to the broader pharmaceutical industry’s ratio of 76, AstraZeneca’s valuation appears attractive. But, can the allure of a low P/E ratio outweigh the rampant earnings decline?

AstraZeneca (AZN): Can Analysts’ Optimism Counter the Risks?

Summary of Analysts’ Outlook:
Analysts have a positive outlook on AstraZeneca PLC, with a consensus rating of Overweight (Buy). The average price target suggests a potential gain of 14.1% from the current price. Most analysts believe the company’s strong pipeline, particularly in oncology, and its cost-saving initiatives will drive growth and improve profitability.

AstraZeneca (AZN): Patents Could Invoke a Major Blow

AstraZeneca has been grappling with significant patent expirations that have been hammering revenue figures. The recent temporary injunction against the distribution of generic Pulmicort Repsules offers some minor relief. However, it’s not enough to shift the bleak outlook caused by ongoing patent challenges. The issue of losing exclusivity in key markets for its Seroquel IR, Atacand, and Crestor products has contributed to a 12% revenue fall in Q1, pushing profit before tax down by 31% to $1.3 billion. This is a critical factor as patent expirations can erode competitive advantages and make future revenue streams less predictable.

Comparing with GlaxoSmithKline

GSK plc

GSK

$39.07

1%

GSK (GSK): Superior Growth Metrics Over AstraZeneca?

GlaxoSmithKline (GSK) presents an interesting contrast. Unlike AstraZeneca, GSK is anticipated to see a 4% growth in EPS this year. This suggests that GSK has a more stable product pipeline and is better positioned to navigate market challenges. If GARP is about balancing growth with reasonable valuation, then GSK’s metrics might make it a more attractive prospect.

GlaxoSmithKline (GSK): Justifying Its Loftier Valuation through Superior Metrics?

GSK carries a higher P/E ratio of 14.5 and a PEG ratio of 3.6. While these figures exclude GSK from being a strict GARP stock by traditional definitions, its better growth prospects provide a stronger investment case relative to AstraZeneca. It’s a classic case of higher risk and higher return, given GSK’s strategic positioning and solid development pipeline.

GlaxoSmithKline (GSK): Analyst Predictions Signal Hope

Summary of Analysts’ Outlook:
Analysts have a positive outlook on GlaxoSmithKline, with a consensus rating of Overweight. The average price target suggests a potential gain of 14.1% from the current price. Many analysts believe that GSK’s pipeline of new drugs, including its HIV treatment and vaccines, will drive future growth. Additionally, the company’s cost-cutting efforts and dividend yield are seen as attractive to investors.

GSK (GSK): The Stronger Pharma Bet?

GSK’s long-term outlook appears more promising. Their strategic initiatives and robust R&D pipeline suggest sustained earnings growth, making it a potentially safer bet for conservative investors. In contrast, AstraZeneca faces medium-term earnings pressure due to ongoing patent expirations and revenue losses.

Detailed Summaries

Snapshot of ASTRAZENECA (AZN): Buy, Hold, Or Sell?

AstraZeneca’s earnings decline is significant. The anticipated 19% EPS drop for 2013, followed by another 5% dip in 2014, signals a worrying trend. The current P/E ratio below 10 says the market may undervalue the company, but a rise above this threshold next year to 10.4 indicates lingering doubts about its future performance.

Examining AstraZeneca (AZN): Lower Valuation Good or Misleading?

When you put AstraZeneca’s prospective P/E and PEG ratios against FTSE 100 and broader pharmaceutical benchmarks, the company’s cheaper face value P/E ratio does stand out. The FTSE 100’s prospective P/E ratio is 16.9, and the pharmaceutical industry’s average P/E ratio is an exorbitant 76, indicating that AstraZeneca might look appealing on the surface. However, this needs to be balanced with considerations about the company’s growth challenges.

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