LONDON -- Shares in pharmaceuticals play Shire (SHP) (NASDAQ: SHPG) have endured a turbulent start to 2013, collapsing 8.8% from February's near-one-year high around 2,150 pence after takeover speculation had earlier propelled stocks higher.
Despite this recent weakness, I believe that stock in the pharmaceuticals giant should head skywards again as galloping R&D work, combined with the likelihood of busy acquisition activity, drives growth in coming years. Goldman Sachs affirmed its 2,675 pence share price target just this month, representing 36% upside from current levels.
Stunning growth potential to drive sales
I believe that the firm's prolific research and development activity should deliver solid revenue growth over the long term. Shire spent $848.8 million on this area last year, a 16% annual rise, which should boost its pipeline and deliver excellent sales further out. Indeed, Goldman Sachs expects revenues to grow around 10% through to 2017 versus a 3% rise across the entire pharma sector.
And Shire's sterling record of innovation should be underpinned by M&A activity in coming years as it puts its $1.4 billion cash pile to work. Shire acquired SARCode Bioscience just last month to boost its opthalmology business -- the U.S. firm's phase 3 compound Lifitegrast product is being tested for dry eye disease. The move follows the purchase of Sweden's Premacure AB in February, which is currently in phase 2 testing for the prevention of eye disorder retinopathy of prematurity, or ROP.
Earnings explosion predicted for 2013
City forecasters expect earnings per share to snap 68% higher in 2013, following last year's 14% decline, with a rise to 147 pence penciled in. These are then expected to advance 14% in 2014 to 168 pence.
The company currently changes hands on a P/E rating of 13.5 and 11.9 for 2013 and 2014, respectively, providing a bloated discount to a forward earnings multiple of 39.7 for the broad pharmaceuticals and biotechnology sector. And Shire's position as a true value stock is underlined by a low price/earnings to growth, or PEG, rating of 0.2 and 0.8 for this year and next -- a reading below 1 is considered excellent value for money.
Despite Shire's recent buyback program -- the firm commenced a $500 million purchase scheme late last year -- the stock does not provide an attractive pick for income investors, with dividend yields of just 0.6% and 0.7% predicted for this year and next below the wider sector's average 2.4% payout.
However, in my opinion Shire's decision to allocate its meaty cash pile toward developing future growth makes it an exciting pick, with revenues ready to balloon in coming years.
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