Plenty of high performing stocks are part of the FTSE 100 index. But not every stock is made equal. Some are definitely better buys than others and have managed to reward investors again and again. Like the the healthcare star AstraZeneca (LSE: AZN). If I had bought it 10 years ago, it would have tripled my money by now.
AstraZeneca’s eye-watering valuation
I know that on the face of it, it comes with risks. A big one is its market valuation. I spend a fair bit of time researching cheap stocks, because they might just have the potential to rise significantly more than pricey ones. And by that argument, AstraZeneca should be an absolute no-go. Right now, it has an unbelievable price-to-earnings (P/E) ratio of 1,510 times as per my calculations based on its recently released full-year earnings report. The only other stock I have seen with such high valuations is Tesla, and there is no way I am about to buy it.
Scratching the surface
If I dig deeper into this story, however, it turns out that AstraZeneca’s full-year 2021 P/E has risen to crazy levels only because of a massive fall in its reported earnings, which needs to be taken with a healthy measure of salt in my view. That is because the latest drop is driven partly by the company’s acquisition of US-based rare diseases’ focused company Alexion, a move whose potential impact I had wondered about earlier as well. It is also down because of items like restructuring, amortisation, and impairments.
If I instead consider the core earnings measure, the number that removes the noise and focuses on the earnings from the main business, it is much healthier. And it gives me a P/E of 22 times, which I think is a truer reflection of the company’s valuation. The reported number is too much of an outlier in my view to give any real perspective!
What is really going on with this FTSE 100 stock?
At this valuation, AstraZeneca does not look terrible expensive to me. I mean it is not significantly higher than that for the FTSE 100 at 16 times. And this is a healthy defensive, with a good outlook for the current year. Speaking of its outlook, the company is optimistic despite the fact that its Covid-19 related numbers are expected to weaken as the pandemic’s grip wanes. Its crucial cancer treatments are likely to hold it in good stead over the foreseeable future. And it helps that it is adding to its portfolio of products, like through the acquisition of Alexion.
I first bought the stock a few years ago, and occasionally buy it on dips even now. It has not disappointed me so far, I look forward to buying more of it in the near future. And holding it for a long time. Because I think it could triple my money over the next decade as well.
