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The late, great investor (and Telegraph Money columnist) Jim Slater famously said that “elephants don’t gallop”.
His aphorism is generally true – it’s harder for large companies to grow quickly than for smaller ones, so rapid share price rises are less common too – but exceptions do come along from time to time.
Shares in AstraZeneca, for example, have surged by 39pc since Questor recommended them in August 2019. Over the same period the FTSE 100 has failed to keep up with the drugs maker’s “gallop” and has gained a paltry 3pc.
The company’s financial performance has been equally impressive. Over the past four years its earnings per share have risen at an annualised rate of around 18pc. And while it trades on a rather heady earnings multiple of 19.1 times following its recent share price rise, the ratio falls to 17.3 when based on forecast earnings as the company delivers on its upbeat long-term potential.
Indeed, its recently released third-quarter results showed encouraging progress. Earnings per share rose by 9pc during the quarter, which means they have increased by 17pc so far this year as the company has benefited from a 6pc rise in quarterly revenue.
This was despite a sharp reduction in sales of Covid medicines, although this had a positive impact on gross profit margins because of the relatively low levels of profit earned on their sales.
Strong quarterly performance prompted the business to upgrade its financial guidance. It now expects full-year revenue excluding sales of Covid medicines to grow by a percentage in the low teens and earnings per share to rise to a broadly similar degree. If achieved, such growth would represent a significantly stronger performance than the vast majority of FTSE 100 stocks during what remains a tough economic period.
Other recent news from AstraZeneca has also been positive.
Questor has always been concerned about the future of the company’s chief executive, Sir Pascal Soriot, who has masterminded its revival from a struggling business that faced a patent expiry “cliff edge” to a fast-growing, well-organised business in a strong position to capitalise on global healthcare trends. His recent assertion that reports of his impending departure were “fake news” was therefore most welcome.
So too was news of the company’s exclusive licence agreement with China’s Eccogene for a weight-loss pill, which is in early-stage development. The global prevalence of obesity almost tripled between 1975 and 2016, and a billion people are expected to be obese by 2030, so there is a tremendous opportunity for growth in this area.
The company also remains well placed to capitalise on global demographic changes, such as a growing and ageing population, that are widely expected to prompt a rise in the prevalence of non-communicable conditions such as cancer and heart disease.
Astra’s improving financial performance enables it to invest more money in research and development in such areas. In the third quarter, for example, R&D spending grew by 5pc and rose by one percentage point as a proportion of revenues. It now amounts to 22pc of sales and the company has more than 120 phase two and phase three projects in its pipeline.
Crucially, greater investment has not compromised AstraZeneca’s financial strength. Debts amount to a modest 63pc of assets while net interest costs were covered more than seven times by operating profits in the first nine months of this year.
And while the global economy faces an uncertain near-term future as the full impact of interest rate rises on growth gradually becomes clear, the company’s defensive credentials remain highly appealing.
In terms of growth potential, more than a quarter of the company’s revenue is derived from emerging markets, where rising incomes are expected to lead to increased demand for healthcare. Although growth in China was sluggish in the most recent quarter and geopolitical risks remain, the world’s second-largest economy nevertheless continues to offer long-term growth potential.
So AstraZeneca remains an anomaly among large stocks. Although it is the second-largest FTSE 100 company by market value and accounts for more than 8pc of the index’s value, it is producing the kind of earnings growth normally associated with far smaller companies. Its solid financial position, strong pipeline and exposure to fast-growing segments and regions make it a highly worthwhile purchase for long-term investors.
Questor says: buy
Ticker: AZN
Share price at close: £101.92
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