AstraZeneca PLC Stock Shows Every Sign Of Being Fairly Valued
- By GF Value
The stock of AstraZeneca PLC (NAS:AZN, 30-year Financials) appears to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $53.07 per share and the market cap of $140 billion, AstraZeneca PLC stock appears to be fairly valued. GF Value for AstraZeneca PLC is shown in the chart below.
Because AstraZeneca PLC is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 4.5% over the past three years and is estimated to grow 11.85% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. AstraZeneca PLC has a cash-to-debt ratio of 0.39, which ranks worse than 68% of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks AstraZeneca PLC's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of AstraZeneca PLC over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. AstraZeneca PLC has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $26.6 billion and earnings of $1.22 a share. Its operating margin is 13.39%, which ranks better than 69% of the companies in Drug Manufacturers industry. Overall, the profitability of AstraZeneca PLC is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of AstraZeneca PLC over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of AstraZeneca PLC is 4.5%, which ranks in the middle range of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is 6.6%, which ranks in the middle range of the companies in Drug Manufacturers industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, AstraZeneca PLC's ROIC is 5.38 while its WACC came in at 2.41. The historical ROIC vs WACC comparison of AstraZeneca PLC is shown below:
In short, AstraZeneca PLC (NAS:AZN, 30-year Financials) stock shows every sign of being fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Drug Manufacturers industry. To learn more about AstraZeneca PLC stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.