AstraZeneca PLC (LON:AZN) was downgraded by Jefferies on Thursday as a recent strong performance in its share price has provided “too great a stretch on the valuation”.
The pharmaceutical company’s shares have risen 22% over the past five months and has now met the target price previously set by Jefferies. On this basis, Jefferies has cut its rating on the stock to ‘hold’ from ‘buy’ but raised its target price to 6,200p from 5,942p.
The new target price reflects a further 5% upside for the shares but this is not enough for Jefferies to keep AstraZeneca at a ‘buy’.
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“To be clear though, the thesis and drivers that led us to upgrade the stock to a Buy in March 2018 are still relevant, and we do still see some further, albeit modest, upside opportunity for the shares,” Jefferies said.
“However, Jefferies’ policy requires 15% upside (including yield) to justify a Buy recommendation and at this point, we view this as too great a stretch on the valuation to justify.”
Jefferies continues to expect earnings growth
When the broker upgraded AstraZeneca to ‘buy’, it argued that it expects a compound annual growth rate of 20% in core earnings per share (EPS) from 2020 to 2022. Jefferies continues to expect this level of growth.
“This significant growth is expected to be delivered by a combination of management action to expand margins and new product successes,” Jefferies said.
In July, the company posted a 2% increase in product sales to US$5.2bn in the second quarter, driven by a strong performance in cancer drugs such as Lynparza, Tagrisso and Imfinzi, asthma treatment Fasenra and diabetes treatment Farxiga.
Core operating profits fell 18% to US$1.3bn and core EPS was down 21% to US$0.69. However, AstraZeneca said it continues to expect full-year EPS of US$3.30-$3.50 as it undergoes a restructuring to cut costs and manage the decline of former blockbusters such as the cholesterol buster Crestor.
'Dividend should be covered by profits by 2020'
“At the Q2’18 results, careful cost control provided a better-than-expected operating margin (24.5%, consensus 23.2%) that contributed to the 7% beat in core operating profits,” Jefferies said.
“Meanwhile, reducing levels of externalisation are expected to see profits and cashflow increasingly derived from the ongoing business, with management having indicated the dividend should be covered by profits from the sustainable business by 2020.”
Jefferies is awaiting the outcome of data from various drug trials over the next year including lupus treatment Anifrolumab, anaemia drug Roxadustat and the combination of cancer treatments Imfinzi and tremelimumab.
Shares in AstraZeneca were little changed at 5,931p in late morning trading.