AstraZeneca shares’ long-term growth has stalled in the past couple of months, thanks to a fluctuating news flow of robust third-quarter results, a vaccine company takeover and clinical drug trials that have variously cheered and disappointed. The impression is of a group trying to move forward in the face of strong headwinds from the global economy, international conflict and national drug regulators.
This column recommended the shares 14 months ago at £99, and again at £110 last August. They rose to £112 before disappointing data for its lung cancer drug Dato-DXd led to an £11 sell-off. The fall was halted a week later by “highly encouraging results” for a batch of other treatments, but that was not enough to make up all the lost ground. Although it is unusual to see a share behaving so unpredictably when the company in question is one of Britain’s biggest, that should yield trading opportunities.
AstraZeneca, based in Cambridge, was originally a 1993 Zeneca pharmaceuticals spinoff from Imperial Chemical Industries that in 1999 merged with Sweden’s Astra. It came to renewed public attention during the Covid-19 crisis as a leading producer of the vital jabs. That side of the business has of course declined, and it has instead recently been making headlines with a weight loss pill.
On another front, last week White House officials met Sanofi and AstraZeneca representatives to discuss supplying an additional 230,000 vaccine doses against the infant respiratory syncytial virus, RSV. Its vaccine takeover, of Seattle-based Icosavax for up to $1.1 billion, will give it an important RSV drug to add to its antibody product, and put it in direct competition with GSK. Iskra Reic, AstraZeneca’s executive vice-president for vaccines and immune therapies, said the acquisition “aligns with our strategy to deliver a portfolio of therapies to address high unmet needs in infectious diseases, and our ambition to protect the most vulnerable patients who have high risk of severe outcomes”.
However, the company’s big long-term bet is on cancer treatments. The latest word from the medical front line is that the race to reverse and, ultimately, cure more cancers is nearing revolutionary breakthroughs, with the help of artificial intelligence.
In November, the company announced third-quarter revenue of $11.49 billion, up 5 per cent — and 12 per cent higher excluding Covid jabs. Reported earnings per share were 89 cents, down 16 per cent, but up 4 per cent after stripping out acquisitions, amortisation of intangibles, impairments, legal settlements and restructuring charges. However, nowadays some of these items are cropping up so regularly that they are becoming less exceptional than a regular cost of doing business.
After nine months, revenue was $33.7 billion, also 12 per cent higher. Core operating profit was 16 per cent higher at $11.8 billion, a 35 per cent margin, producing $5.80 core earnings per share (EPS). Those numbers prompted the management to boost its full-year core EPS percentage growth guidance from “high single-digit to low double-digit” to “low double-digit to low-teens”. On the basis of 2022’s $6.66 core EPS, that should translate to around $7.46 for the year about to end. The full-year results will be announced on February 8.
Hargreaves Lansdown said these results were “eye-catching”, arguing that “AstraZeneca has an outstanding track record of delivering novel therapies and it is not standing still”.
Pharmaceutical makers offer the prospect of healthier lives through finding solutions for ailments new and old. The question is which of them is likely to maintain the best innovation stream and manage it efficiently to produce optimum financial returns.
AstraZeneca keeps research and development (R&D) spending ahead of inflation and is working on nearly 200 projects. Only last week the magazine Nature highlighted the potential in controlling the hormone GDF15, identified as the cause of hyperemesis gravidarum or severe pregnancy sickness.
While there will undoubtedly be hiccups in the R&D pipeline, the company seems set for steady growth. Likely 2023 earnings are on course to produce a price-earnings ratio of 13.5 at the present price, a level well below that of its nearest rival GSK, tilting the balance towards low risk and high value.
ADVICE Buy
WHY The recent pause in the share price should be seen as a buying opportunity
Domino’s Pizza Group
Domino’s shocked the stock market last month when it revealed that orders for the 13 weeks ending September 24 had slipped compared with the same period in 2022, by 1.2 per cent to 16.7 million. The shares fell 25¾p, or 6.9 per cent, on the day to 345¾p. They have since more than recovered, but questions remain over the strategic plans of the new chief executive, Andrew Rennie.
He clearly feels the company has not been making the most of marketing opportunities. The post-Covid push to encourage consumers to collect orders, instead of having them delivered, meant that in the third quarter collections grew 8.4 per cent while deliveries fell 6.3 per cent. The company insists cannibalisation has been minimal because collection customers are a different breed — bluntly, more price-conscious. Domino’s is largely appealing to them with cheap deals it hopes will be more than offset by savings from employing fewer deliverers. Which makes it puzzling that the company plans to trial deliveries through Uber Eats, complementing the existing arrangement with Just Eat.
Rennie is pinning hopes on a long-awaited first loyalty scheme next year, which is expected to build on a highly successful switch to app sales, again driven by generous price cuts.
All that could endanger profit margins, both at group level and for the 1,300 stores’ franchisees. But the broker Liberum’s analysts are excited by ideas for maximising franchisee profitability.
Longer-term questions relate to Rennie’s apparent determination to launch a second brand in the UK, and reverse his predecessor’s withdrawal from foreign territories. A new trading name should help to fight off the likes of Starbucks, but could suck sales from the Domino’s brand. And the company pulled out of Germany only this year after losing millions of pounds. Rennie clearly believes he can overcome problems on both scores.
For the present year, he expects underlying ebitda (earnings before interest, taxes, depreciation and amortisation) of £132 million to £138 million, not a million pizzas away from 2022’s £135 million. That should repeat last year’s 18.8p EPS and 10p dividend, for a 20.7 price-earnings ratio and 2.5 per cent yield.
ADVICE Hold
WHY Questions temporarily outweigh potential
