Can AstraZeneca Outperform Merck?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250, and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at two big pharmaceutical firms that are both battling the effects of the patent cliff: U.K.-listed AstraZeneca  (LSE: AZN  ) (NYSE: AZN  ) and U.S. company Merck  (NYSE: MRK  ) .

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, AstraZeneca or Merck?

Metric

AstraZeneca

Merck

Current price-to-earnings ratio (P/E)

9.9

22.0

Forecast P/E

9.2

12.2

Price-to-book ratio (P/B)

2.6

2.5

Price-to-sales ratio (P/S)

2.2

2.8

AstraZeneca looks like a clear winner in the value category, offering investors the chance to buy into the company at a P/E ratio well below the market average. Although AstraZeneca's lower P/E suggests that investors believe the company's earnings might continue to fall, Astra has a lot of cash, little debt and a determined new management team. This combination of advantages should help it to fund the acquisition and development of the new drugs it needs to replace key products which lose their patent protection this year.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do AstraZeneca and Merck compare in terms of income?

Metric

AstraZeneca

Merck

Current dividend yield

5.6%

3.9%

5-year average historical yield

5.5%

4.3%

5-year dividend average growth rate

8.4%

2%

2013 forecast yield

5.9%

3.9%

AstraZeneca takes a clear lead in the income stakes, as its 5.6% dividend yield is 45% greater than Merck's 3.9% yield. Looking ahead, the picture remains the same, and Astra's stronger historical growth rate is also in its favor. AstraZeneca's dividend has quadrupled its dividend since 2003, whereas Merck's remained on hold from the third quarter of 2004 until the final quarter of 2011 -- that's a long time without a pay rise!

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation, if they are to protect their market share and profit margins.

How do AstraZeneca and Merck shape up in terms of growth?

Metric

AstraZeneca

Merck

5-year earnings-per-share growth rate

5.9%

6.1%

5-year revenue growth rate

(1.1%)

14.3%

5-year share price return

75.7%

1.7%

Once again, AstraZeneca looks the more attractive of this pair, although I do have some reservations about the quality of its earnings growth, as I suspect much of it was generated by the hefty share buybacks the company has engaged in in recent years. These share buybacks have now stopped, freeing up cash to fund new drugs, but Merck's strong revenue growth does look good in comparison to Astra's stagnant performance.

Should you buy AstraZeneca or Merck?
The figures above suggest to me that AstraZeneca is currently a far more attractive purchase than Merck, and I believe that Astra's newish CEO, Pascal Soriot -- who has already announced several new joint ventures and shaken up the firm's senior management -- will succeed in his plan to turnaround his company.

Of course, if you already own shares in AstraZeneca, then you may be looking for another high-quality income opportunity, such as the one I mention below. With one week left until this year's ISA deadline, it could be an ideal choice for topping up your ISA with an attractive, high-yielding blue chip stock.

2013's top income stock?
Although both Merck and AstraZeneca are attractive income shares, the U.K. utility sector remains one of the best places to find reliable, high-yielding income stocks. But not all utilities are equal and some are facing serious challenges that could lead to dividend cuts.

The Motley Fool's top analysts have looked closely at all of the listed U.K. utility companies and identified one FTSE 100 utility share which offers a 5.7% dividend yield and which they believe may be undervalued by up to 20%. They are so confident in this share that they've named their report "The Motley Fool's Top Income Stock For 2013"!

This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.

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  • Report this Comment On March 30, 2013, at 5:24 PM, cdb5556 wrote:

    Soriot has already announced big layoffs..more to come I'm sure. Unfortunatley, AZ's future will be similar to SNY. they brought in a new hotshot CEO (Viebacher) who slashed R and D, laid off massive amounts of field sales and homeoffice personnel, and is re-making the one-time "big pharma" company into a generic-vaccine company, with a small biotech division (genzyme) for developing "orphan drugs" for exotic diseases.

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