The performance of AstraZeneca (LSE: AZN) has started to improve significantly in recent quarters. The FTSE 100 pharma stock has returned to growth after what has been a long and arduous journey. It has suffered from the impact of patent losses, with its financial performance having disappointed significantly in recent years.
Now, though, growth is expected to continue over the long run. As such, now could be a time to buy it at a moment when a number of FTSE 100 shares, including one that reported on Thursday, may be overvalued after the index’s strong start to 2019.
High valuation
The stock in question is support services business Rentokil (LSE: RTO). Its full-year results showed continued improvements in revenue and profitability. Sales increased by 13.2% on an ongoing basis, while ongoing operating profit increased by 13.3% at constant currency. Its strategy of focusing to a greater extent on innovation and digital technology appears to be bearing fruit, while acquisitions have also helped to improve the financial performance of the business.
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Looking ahead, the stock is forecast to post a rise in net profit of 10% in the current year. While this would represent a strong performance, its share price appears to fully factor this in. Having risen by 19% in the last year, it trades on a price-to-earnings (P/E) ratio of around 25, which suggests that it lacks a margin of safety.
Therefore, while Rentokil is performing well from a business perspective, its investment appeal appears to be limited. There may be better alternatives in the FTSE 100 which offer growth at a more reasonable price.
Improving prospects
As mentioned, AstraZeneca has returned to growth in recent quarters. In the current year, this trend is due to continue. The company is forecast to record a rise in net profit of around 13%, with it on course to deliver further growth beyond 2019. Further investment in its pipeline is expected to strengthen its competitive position, as well as provide a growth catalyst for its profit and dividends over the medium term.
Despite this, the stock continues to offer good value for money. It trades on a price-to-earnings (P/E) ratio of 20, which could represent value for money given that it has the capacity to provide double-digit earnings growth over the long run. Alongside this, its defensive profile and the long-term tailwind which an ageing population could provide to the wider healthcare industry mean that it is well-placed to generate improving levels of total returns in the coming years.
As such, buying AstraZeneca now could prove to be a shrewd move. It may have been a poor performer from a business perspective in previous years, but a revised strategy is now expected to come good. With a dividend yield of around 3.5% from a shareholder payout that is due to be covered 1.4 times by profit this year, it could prove to be a worthwhile retirement stock.
