Charles Stanley maintains its ‘Reduce’ recommendation on AstraZeneca and gives five reasons why

14th January 2014

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Charles Stanley Research has maintained its ‘reduce’ recommendation on AstraZeneca (AZN) despite the pharma giant providing an update on its progress at a JP Morgan Healthcare Conference.

AZN itself says that “a return to growth should come earlier than analyst consensus currently forecasts” and that it expects “2017 revenues to be broadly in line with

2013 revenues”. A more detailed update will be provided at the full year results on 6 February.

The broker says that with short-term guidance still in place for the full year 2013 Earnings per share to decline at a significantly higher rate than full year 2013 revenue it has a Reduce recommendation. Full year 2013 revenue to be released 6 February is currently forecast to be $25.8bn while full year 2017 revenue is currently forecast to be $23.8bn, i.e. 8% lower, Charles Stanley says.

It notes AZN says it expects a return to growth earlier than analysts are currently forecasting and that 2017 revenues should be broadly in line with 2013 revenues.

The statement follows AZN’s acquisition of Bristol-Myers Squibb’s interest in the companies’ diabetes alliance, announced in December of last year, and expected to complete during the first quarter of 2014, with new product launches from the alliance’s diabetes pipeline expected to add to growth.

The broker gives five reasons why it is maintaining its recommendation

1) there is little new in the announcement

2) the comment is restricted to top-line growth, no comment has been made about earnings growth and we assume that further spend will be necessary in order to support sole ownership of the diabetes alliance

3) AZN is to pay Bristol-Myers Squibbs both sales-related royalty and milestone payments

4) caution has been expressed by some analysts that key assets including Bydureon, Onglyza and Forxiga are second in class

5) a $1.7bn impairment charge is being taken against Bydureon, which, despite management’s confidence, has delivered sales performance below AZN’s expectations at the time of acquisition.

Charles Stanley adds that at a price of 3663.5p AZN is trading on a FY1 Price to Earnings Ratio of 13.6x (a 10% discount to its pharma peer group average of 15 times and offers a yield of 4.7%).

“Given our concerns and a preference to see firm evidence of a return to growth before moving our recommendation, we retain our Reduce recommendation,” it adds.

 Mindful Money contributor Edmund Shing takes a very different stance on the stock. Read his view by clicking here.

 

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