Image source: Getty Images
FTSE 100 pharma giant AstraZeneca (LSE: AZN) recently delivered yet another set of outstanding results.
Double‑digit revenue growth in key divisions, a stream of positive new drug trials, and a burgeoning pipeline all reinforce the company’s long‑term earnings power. Yet the market still seems reluctant to price in the strength of its underlying business.
So where ‘should’ the shares be trading and what are the catalysts that could power such a move?
What’s the stock’s ‘fair value’?
Price and value are different concepts for shares. Price reflects whatever buyers and sellers are willing to agree on at a given moment. But value is determined by the underlying strength and prospects of the business itself.
For long-term investors, that distinction matters because over time market prices tend to move toward a company’s fair value. This is why understanding the gap between the two metrics can be so powerful for building returns.
Discounted cash flow analysis is one of the most rigorous ways to estimate fair value. It projects future cash flows and discounts them back to the present. The greater the uncertainty in those forecasts, the larger the discount applied.
Analysts’ DCF models differ depending on their core assumptions. Using mine — including a 7.2% discount rate — AstraZeneca shares are 44% undervalued at their present £133.95 price.
That suggests a fair value of £239.20 — far above where the shares trade today.
Therefore, if market prices continue to converge toward fair value over time, this could represent a compelling opportunity, if those DCF assumptions prove correct.
What could force the gap to close?
Sustained earnings growth drives price gains for any stock over the long run. A risk for AstraZeneca is any slowdown in the ramp‑up of launches in its key Oncology and Rare Disease divisions.
Another is any regulatory or clinical setbacks across its late‑stage product-testing pipeline. These could delay commercialisation timelines and reduce the visibility of future cash flows.
Nevertheless, analysts forecast its earnings will increase by a strong average of 13.1% a year over the medium term at least.
Its Q1 2026 results saw core operating profit up 12% year on year to $4.25bn (£3.15bn). The number reflected strong demand across Oncology and Rare Disease and continued operating leverage despite higher R&D investment.
Total revenue grew 13% to $15.29bn, highlighting continued uptake of newer medicines and solid contributions from established brands despite ongoing generic pressures.
Consequently, management reaffirmed its full-year 2026 outlook, expecting low double-digit core earnings per share growth. It also reiterated its 2030 target of hitting $80bn in annual revenue.
My investment view
AstraZeneca’s strong and consistent earnings growth should catalyse the closure of the current price‑to‑value gap over time. As newer medicines scale and later‑stage assets reach the market, the company’s cash‑generation profile should become increasingly visible to investors.
Management’s reaffirmed 2026 outlook and its confidence in hitting the 2030 $80bn revenue ambition also provide a clear long‑term roadmap. If those targets continue to be met, the market may re‑rate the shares towards what I think is their fair value.
For investors seeking dependable growth backed by robust fundamentals, that potential convergence makes the stock worthy of serious attention. And it is certainly compelling enough for me to be looking to add to my holding in the firm very shortly.
Source link
