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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Take your medicine with lowly rated AstraZeneca
A glance at the above chart of the FTSE 100 highlights the weakness in equities as stalemate in Washington between the political parties over raising the federal debt ceiling weighs on investors appetite for risk.
The relief rally that supported equity markets last week, following the positive announcements regarding Eurozone sovereign debt, came to an abrupt halt as a bigger cloud cast a shadow over the global recovery.
Political paralysis between the Republicans and Democrats has caused growing uncertainty amongst investors as they struggle to agree on the terms to raise the $14.3 trillion debt ceiling ahead of the August 2nd deadline, which could trigger the world’s largest economy to default on its debt.
Negative sentiment surrounding the US debt issue cast doubt over the markets, as fears resurfaced over last week’s agreement by European leaders to provide further aid for Greece. Government bond yields in Italy and Spain spiked to over 6% as fears of contagion from the peripheral Eurozone states resurfaced.
Economic data from the US also deterred investors after durable goods orders fell 2.1% in June. Durable goods are closely watched as an indicator of manufacturing, which has been one of the few bright spots in the recovery. With growth stalling amid high unemployment, however, it increases the risk that a slowdown in business investment will weigh on the economy in the second half of the year.
Despite the macro-economic headwinds, the corporate earnings from the UK and US have been robust. Astra Zeneca, for example, increased profit guidance as well as a capital return pledge and Amazon topped analyst’s expectations.
The Vix volatility index, a widely watched measure of risk aversion, rose over 30% this week to its highest level since March and gold surged to a record high as investors sought safe havens.
Technical analysis continues to illustrate the choppy sideways trading experienced throughout 2011. Support is seen at 5800, 5755 and 5650 with resistance likely at 5950 and 6100.
In conclusion, Washington’s lack of progress is a huge disappointment for investors. Instead of benefitting from last weeks announcement in Europe by removing the default risk in the US and creating a foundation for global markets to build on, the growing uncertainty has raised doubts again in Europe and the US economy, pushing equities back towards the recent lows.
I still believe a last-minute deal will be reached, which will boost the markets, but the longer this uncertainty remains, the lower we are likely to go in the short-term.
AstraZeneca (LON:AZN), the Anglo-Swedish pharmaceuticals group spearheaded the UK corporate earnings season, the majority of which beat analysts dampened expectations.
Britain’s second-biggest drug maker raised its 2011 earnings outlook and promised to commit an extra $1 billion to its share buy-back program, boosting earnings per share in the process. Second quarter sales rose around 3% to $8.43 billion, ahead of forecasts of $8.24 billion and the company generated a core pretax profit of $3.22 billion.
On Thursday the group announced that it would be using the entire proceeds from last months $1.8 billion cash sale of Astra Tech, for share buy-backs this year. The extra buy-backs combined with favourable exchange rates means that AstraZeneca now expect core earnings per share this year of $7.05 to $7.35, up from $6.95 to $7.25.
At current levels these forecasts put the company on a lowly 7x forecast earnings, considerably below that of rival GlaxoSmithKline that trades on 12.7x. The interim dividend was also raised by 21% to offer shareholders a 6% annual yield, above the 5% on offer at Glaxo.
The valuation anomaly between the two drug giants has emerged as investors fret about the pipeline for new drugs at AstraZeneca and the limited growth that is expected as a result.
Strong financial and strategic discipline from management has however improved future earnings forecasts. The company last week won US approval for its Brilinta anti-blood clotting medicine, which is regarded as a key product for AstraZeneca helping offset some expiring patents. The company now expects to generate between $3 billion and $5 billion in revenue from new drugs by 2014 to meet its sales target range of $28 billion to $34 billion.
The above chart of AstraZeneca shows the shares have traded sideways for much of the last two years, compared to rival Glaxo which has gained over 20% in the same period. Historical resistance at 2930p now appears to be supporting the share price and with the oscillators in oversold territory, buying the shares now offers an attractive risk/reward bias.
An ageing population and robust demand for their products in times of tough economic conditions create a strong balance sheet with defensive attractions. Experienced management are cutting costs, prospects for future growth look much improved and on just 7x earnings the shares look too cheap.
At the time of writing the share price is 3016.5p and targets are seen at 3175p, 3263p and 3380p, with a stop loss marginally below support at 2889p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in AstraZeneca, but client accounts may. The material in this report has come from Simply Charts and AstraZeneca’s corporate website.
