Has AstraZeneca Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if AstraZeneca (NYSE: AZN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at AstraZeneca.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.7% Fail
  1-Year Revenue Growth > 12% (1%) Fail
Margins Gross Margin > 35% 81.3% Pass
  Net Margin > 15% 26.7% Pass
Balance Sheet Debt to Equity < 50% 43.2% Pass
  Current Ratio > 1.3 1.36 Pass
Opportunities Return on Equity > 15% 39.5% Pass
Valuation Normalized P/E < 20 7.63 Pass
Dividends Current Yield > 2% 6.8% Pass
  5-Year Dividend Growth > 10% 10.2% Pass
       
  Total Score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AstraZeneca last year, the company has hung on to its eight-point score. But shares have fallen nearly 20% over the past year as the drugmaker hasn't found a way to boost its revenue growth.

Like many of its peers, AstraZeneca faces a patent cliff for some of its established drugs. With both Teva Pharmaceutical (Nasdaq: TEVA  ) and Mylan (Nasdaq: MYL  ) having launched generic equivalents of some of its blockbuster drugs, AstraZeneca has struggled to keep its sales up.

For pharma companies to defend themselves from generic competition, mergers have become a bigger part of the industry dynamic. With Amylin Pharmaceuticals (Nasdaq: AMLN  ) having put itself up for sale, the biotech would actually make a reasonably good fit for AstraZeneca if it could persuade Bristol-Myers Squibb (NYSE: BMY  ) to join it by buying it for their diabetes joint venture. But according to rumors, it's not one of the companies that have put in bids to buy Amylin, and so far, it really hasn't made big moves on the acquisition front.

Unfortunately, AstraZeneca's pipeline has also hit some snags. Earlier this year, the company gave up on its depression drug TC-5214 after phase 3 trials failed to reach their goals. Without some successes to make up for failures, AstraZeneca will have a hard time keeping its current position.

To improve, AstraZeneca needs to find a way to reawaken its sales growth. A blockbuster drug could do that, but until the company finds one, it's more likely to go backward on its path toward perfection than forward.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

AstraZeneca isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add AstraZeneca to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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