UK markets closed

Why I’d buy the AstraZeneca (AZN) share price for a second income stream

Alan Oscroft
Pills spilling out of a prescription pot

What can you say about AstraZeneca (LSE: AZN)? Well, for one thing, since the arrival of Pascal Soriot as CEO in 2012, the outlook for shareholders has improved dramatically. I fact, since he joined, the AstraZeneca share price has gained 150%.

At the time, the firm looked to be somewhat meandering in its approach, and hadn’t been investing adequately in research and development. As a result, it suffered badly from a much-publicised loss of patents and competition from generics.

Today, we’re looking at a considerably more focused company, with a healthy stream of new drugs coming through its development pipeline. There’s a big return to earnings growth on the cards for 2020, despite a minor disappointment for 2019.

Missed expectations

A tougher fourth quarter saw the pharmaceuticals giant miss analysts’ forecasts for core operating profit. A reported Q4 figure of $1.55bn came in below the City’s expectations of something closer to $1.8bn.

There’s a little future negativity too, as a result of the coronavirus outbreak. Speaking of its 2020 outlook, the company said: “Depending on the impact of the Covid-19 epidemic, total revenue is expected to increase by a high single-digit to a low double-digit percentage and core EPS is expected to increase by a mid- to high-teens percentage.”

China is AstraZeneca’s second largest, and fastest growing, market, and the full effect of the epidemic is still very much unknown. The firm said its “guidance assumes an unfavourable impact from China lasting up to a few months,” adding that it “anticipates providing an update at the time of the Q1 2020 results.

The share price dropped 6% in early morning trading, presumably in reaction to all the coronavirus headlines. But that was quickly reversed and, as I write, the shares are largely unchanged since close on Thursday.

Investment

I reckon quarter-by-quarter results aren’t really very important for long-term investors, especially not for a company like AstraZeneca. The drug development cycle is a long one. And I think we really need to be looking at five-year and 10-year cycles, at least.

With that view, I’m very optimistic over AstraZeneca’s long-term prospects. I’ve already mentioned the growing importance of China. We’re looking at more than a billion people whose wealth is rising faster than just about anywhere else on earth.

One result of that is ailments of the developed West are going to become more prevalent. To a large extent that’ll be due to people increasingly surviving diseases of poverty. So, on the whole, it’s not a bad thing. And with increasing affluence, there’ll be increasing cash available to provide better healthcare.

As my colleague Andy Ross pointed out, AstraZeneca is big in oncology research and development, and I think that could prove to be very profitable in the long run.

Valuation

My only caution concerns AstraZeneca’s share price valuation. We’re looking at a P/E of around 24 for 2020 forecasts, while rival GlaxoSmithKline commands a multiple of only 14. But AstraZeneca’s predicted growth would drop it to 19 by 2021, and I expect more to come in subsequent years.

I think dividends are likely to start rising again before much longer too, and I see a long-term income stream here.

The post Why I’d buy the AstraZeneca (AZN) share price for a second income stream appeared first on The Motley Fool UK.

More reading

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020