AstraZeneca continues to trade at discount to peers GlaxoSmithKline and Shire

… AstraZeneca’s shares currently trade at about 7.7x forecast earnings for 2010, which compares to a multiple of 10.3x for GlaxoSmithKline and 17.2x for Shire.

A glance at the above chart of the FTSE 100 shows the consolidation experienced on equity markets this week after the rapid gains encountered recently.

The blue chips have been underpinned by the mining sector, which has a strong weighting in the FTSE 100. Recent weakness in the US currency has generated a surge in the price of gold and other commodities this week, with the precious metal trading at a record high above $1150 an ounce.

Minutes from the November Monetary Policy Committee (MPC) meeting showed policymakers were at their most divided, with a three way split this month on whether to create more money. Seven of the nine members voted for £25 billion of additional stimulus, one wanted a £40 billion boost and another for no additional quantitative easing (QE).

US economic data has weighed on the market, with the cost of living increasing by a larger than forecast 0.3% in October. In addition, news that housing starts had unexpectedly fallen by 10.6% in October, versus an expected rise of 1.7% to their lowest level in seven months, which also raised fears on the rate of improvements in the underlying economy.

Technical analysis highlights the continued upward trend, as the FTSE powers towards 15 month highs this week. The inherent buying momentum continues and the relative strength index (RSI) confirms this by posting a fresh medium term high.

In summary, there is likely to be some consolidation after the sharp moves experienced over the last two weeks, with support seen at 5300 and 5180. However, corporate earnings are improving and the door has been left open to further QE, so I believe the upward trend is likely to continue for the time being, with a target seen at 5620.

I believe it is an extremely high risk strategy to trade against the recent upward trend, but I remain mindful of how far the purely cyclical stocks can advance from here given the muted outlook for real growth in the economy over the next two years.

In light of the 56% rally from the March lows and the possibility for cyclical rotation, I have been focusing my trading on stocks that are well supported by a strong fundamental backdrop and are within close proximity to technically significant levels.

AstraZeneca (Epic: AZN) is one of the worlds leading pharmaceutical companies operating in over 100 different countries. Recent diversification to deliver sustainable future sales and earnings growth has taken them away from the traditional large pharmaceutical model associated with the sector.

AstraZeneca unveiled a better than expected third quarter update on the 29th October, with pre-tax profit rising by 27% to $3.4 billion, as revenue increased by 5% to $8.2 billion.

It is worth noting that the results were flattered by the $453 million contract with the US government for its nasal spray swine flu vaccine and the delay of cheap generic rivals to its Toprol XL heart drug and Casodex cancer drug, although both have now hit the US market.

However, the results were well ahead of forecast and the company has also undergone significant cost cutting, with research and development costs in particular down 16% due to productivity improvements. As a result, margins have subsequently risen an extraordinary 44% and CEO David Brennan, upgraded the company’s forecasts for earnings per share for the year from $5.70 - $6.00 to $6.20 - $6.40.

Recent news regarding their drug pipeline should also help reassure the market, as their anti cholesterol drug Crestor, was flying off the shelves in the third quarter, with sales up 30% to $1.1 billion. It has also been proven this week that Crestor cuts cardiovascular problems in women.

Furthermore, their anti blood-clotting drug Brillinta has proved more effective than the widely used Plavix and has this week been submitted for regulatory approval. Analysts believe Brillinta is forecast to deliver annual sales of at least $1.2 billion by 2014.

AstraZeneca’s shares currently trade at about 7.7x forecast earnings for 2010, which compares to a multiple of 10.3x for GlaxoSmithKline (LSE: GSK) and 17.2x for Shire (LSE: SHP). This is a substantial discount to UK and European peers and a strong cash flow has facilitated a near zero net debt position. In addition, some recent comment has suggested that it could generate its entire market capitalization (£39 billion) in cash over the next six years.

The group also yields around 5% for next year, which is inline with GlaxoSmithKline and is over twice covered by earnings.

As can be seen from the above chart of AstraZeneca the shares rallied around 35% off their March lows, before falling back slightly over recent months.

The company appears to have found support marginally below 2700p and the higher lows traded on the RSI recently suggests that buying momentum is starting to materialise.

If we combine the earlier analysis of the FTSE 100, with this company’s strong fundamental analysis and relative discount to sector peers, I am inclined to suggest the shares may offer an attractive buying opportunity.

At the time of writing the share price is 2706.5p and given the close proximity to support, the shares may offer an appealing risk/reward ratio. Near term targets are seen at 2815p, 2843p and 2960p, with a tight stop loss marginally below support at 2625p.

This article was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in AstraZeneca. The material in this report has come from Simply Charts and AstraZeneca’s corporate website.