Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy Shire Today?

By Royston Wild - Apr 16, 2013 at 10:54AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How attractive are the shares of Shire?

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.

The canny guide for clever investors
If you already hold shares in Shire, check out this newly updated special report that highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.

Woodford -- head of UK Equities at Invesco Perpetual -- has more than 30 years' experience in the industry, and has identified three other fantastic pharmaceutical firms in the report set to deliver spectacular investor returns.

The report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Shire plc Stock Quote
Shire plc
SHP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.