FTSE 100

Is AstraZeneca’s share price overvalued after doubling in the past 5 years?

Could AstraZeneca shares be unappealing relative to other FTSE 100 index stocks?

Over the past five years, the AstraZeneca (LON: AZN) share price has more than doubled. By contrast, the FTSE 100 index has risen by just 9%.

Investors, it appears, have become increasingly upbeat about the pharma stock’s growth potential. Indeed, it has been able to significantly improve its financial prospects over recent years as a result of a stronger pipeline. This was evident in its recent second-quarter results. The firm delivered 25% revenue growth at constant currency, with all regions and disease areas performing well.

However, the company’s shares now trade on a forward price-earnings ratio of around 37 using current year forecasts. This is significantly higher than many FTSE 100 index stocks, which could lead some investors to deduce that AstraZeneca’s stock price lacks a margin of safety.

Looking ahead, the firm is forecast to post a 40% annualised rise in earnings per share over the next two financial years. This could help to justify such a large rating at the present time. Indeed, using AstraZeneca’s 2023 financial year earnings per share forecast of 497p, it currently has a forward price-earnings ratio of around 18. When its prospects beyond 2023 to deliver further earnings growth are factored in, it could offer far better value for money than appears at first glance.

In addition, AstraZeneca could offer dividend investing appeal over the coming years. Although it currently yields just 2.3%, versus in excess of 3% for the FTSE 100 index, dividend growth is expected to be above inflation. In fact, the company’s dividend growth is forecast to be above 4% over the next two financial years.

Furthermore, the recent acquisition of rare diseases specialist, Alexion, is expected to strengthen the company’s product pipeline. This could further enhance its long-term growth in a range of areas – especially since there is minimal crossover between the two companies’ product portfolios.

Of course, acquisitions can be difficult to integrate. Indeed, investor sentiment has been somewhat mixed following news of the takeover. Furthermore, risks such as further disruption caused by Covid-19 and economic uncertainty may threaten the growth prospects for AstraZeneca, as well as investor sentiment towards the FTSE 100 index.

However, on a long-term view, the company’s shares do not yet appear to be overvalued. AstraZeneca’s earnings growth prospects, improving pipeline and increasing income appeal could allow its share price to continue to outperform the FTSE 100 over the coming years.


Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

Join the conversation