However, I think we’re looking at a case of market over-exuberance. In this article, I’ll explain why I believe the stock is far too highly rated, and why I’d rather invest in gene-editing firm Horizon Discovery (LSE: HZD) where I see not only exciting growth prospects, but also an attractive valuation.

Now bigger than GSK

Remarkably, within the last year, AstraZeneca has overtaken long-time bigger FTSE 100 peer GlaxoSmithKline. AZN’s market capitalisation currently stands at £94bn (up from £57bn five years ago), while GSK’s is £83bn (up from £70bn five years ago).

AZN trades at 4.9 times current-year forecast sales of $24bn (£19.2bn at current exchange rates), while GSK is rated at just 2.5 times its far higher forecast sales of £32.6bn.

Cor(e) blimey!

I’ve highlighted AZN’s sky-high price-to-sales multiple relative to its rival, because I believe AZN’s preferred ‘core’ earnings measure overstates its real core earnings. In recent years, AZN has divested numerous non-core older drugs, but included the profits from these in its ‘core’ earnings. My sums say this has plumped up core earnings by between 20% and 33% a year.

The company has guided on core earnings per share of $3.50 to $3.70 (288p at the mid-point) for the current year. The share price of 7,167p represents about 25 times the guided earnings. This is a high multiple as it is, but if what I consider to be real core earnings are 20% to 33% lower, the multiple goes up to between 31 and 37.

Now, AZN’s earnings prospects are good, but not earnings-multiple-in-the-30s good, in my opinion. This is why I’m avoiding the stock.

Transitioning

Founded in 2005, and listed on London’s junior AIM market in 2014, Horizon Discovery is a global leader in cell engineering, using innovative gene editing and gene modulation technologies. Its customers are academic institutions and pharma companies, including AstraZeneca.

Horizon appointed a new chief executive last year — a veteran biotech tools commercial leader — who’s put together a highly experienced team, as the company transitions from building scale to profitable growth.

Credible prospect

Ahead of its latest half-year results, released last week, its shares were trading at 138p. They ended the week at 158p, giving the company a market capitalisation of £238m.

Management reported a strong start to the second half of the year and said it anticipates full-year revenue to be in line with market expectations. These expectations are for £63.8m, meaning the stock is trading at 3.7 times sales, compared with AZN’s 4.9 times.

This time last year, Horizon’s shares were comfortably above 200p, the board having rejected a 181p-a-share offer from Abcam some months earlier. Why can we buy them for just 158p today? I reckon it’s probably down to persistent selling by beleaguered fund manager Neil Woodford, who thankfully now seems to have completed the disposal of his one-time 25% stake in the company.

I think Horizon is a credible growth prospect, and with a valuation of 3.7 times sales and the Woodford overhang finally gone, I rate the stock a ‘buy’.

The post Forget AstraZeneca. I’d buy this small-cap Neil Woodford has sold appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Abcam and AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Transitioning to profitability

Horizon Discovery (LSE: HZD) is listed on London’s junior AIM market. At a share price of 173p, its market capitalisation is £260m.

It’s a global leader in the design, manufacture and application of gene editing and gene modulation technologies. Its products and services are used by researchers and drug developers, and it counts major pharmaceutical companies, including AstraZeneca, among its customers.

Horizon has been building scale and is currently loss-making. However, it’s appointed a commercially savvy chief executive to lead its transition to profitable growth. Annual results are due next Monday, and company guidance is for revenue of £58.7m, gross margin in excess of 67% (versus 62% in 2017), and year-end cash of not less than £25m.

There’ll still be a bottom-line loss at this stage, but I view a valuation of 4.4 times sales as attractive for a cashed-up company with strong growth prospects. Horizon’s management turned down a 181p a share takeover approach from Abcam last year, saying it “fundamentally undervalues” the business. I see the stock as a credible speculative buy.

Exponential revenue growth

Optibiotix (LSE: OPTI) is another AIM-listed company. At a share price of 81.5p, its market capitalisation is £70m.

It develops compounds that modify the human microbiome. These compounds help in the prevention and management of chronic lifestyle diseases, including obesity, high cholesterol and diabetes. It’s moved from research and development to inking an impressive 30-odd (and counting) commercial deals with food and pharmaceutical companies.

Ordinarily, I wouldn’t buy a stock trading at more than 10 times sales — required revenue of not less than £7m in Optibiotix’s case, versus actual revenue of just £541,000 in 2018. However, 85% of this was generated in the second half of the year, and we’re in the very early stages of its partners ramping up sales.

Due to the prospect of exponential revenue growth — much of which will drop straight to the bottom line under the company’s licensing business model — this is a rare instance where I’d be prepared to ignore my less than 10 times sales rule. As such, it’s another stock I see as a credible speculative buy.

Rising earnings

Vectura (LSE: VEC) is a constituent of the main market FTSE SmallCap index. At a share price of 72.5p, its market capitalisation is £482m.

It’s a leading designer of devices and developer of products that help patients suffering from airways diseases. It has growing global royalty streams from 20 products, and a portfolio of drugs in clinical development with multiple partners, including FTSE 100 group Hikma and Swiss giant Novartis.

Vectura posted a hefty loss on revenue of £160m last year. This was due to (non-cash) charges, including a £39.8m impairment after a disappointing result from one of its pipeline programmes. However, cash flow was strong, and even after investment of £12.3m and share buybacks of £13.8m, year-end cash increased to £108.2m from £103.7m at the start of the year.

The stock is trading at 15.4 times forecast 2019 earnings of 4.7p a share. And the multiple falls to 12.7 times next year’s forecast earnings, with City analysts having pencilled in 21% growth to 5.7p a share. The valuation looks attractive to me, and I’d be happy to buy the stock.

The post 3 under-the-radar healthcare stocks I think have great growth potential appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Abcam, AstraZeneca, and Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Its shares are trading almost 50% higher than a month or so ago, with much of the gain having come as a result of the announcement of a takeover bid last week from £2.6bn AIM-listed peer Abcam. Horizon’s board said the unsolicited all-share offer at 181p was “highly opportunistic” and “fundamentally undervalues the company and its future prospects.”

Towards profitability

Horizon today released its annual results, commented further on the valuation and also announced the appointment of a new permanent chief executive. The new CEO, Terry Pizzie, who joined Horizon last year as Head of Commercial Operations, is said to have been “instrumental in building a world-class commercial team,” as the company transitions “from building scale through acquisitions towards becoming a sustainably profitable business.”

For the moment, Horizon continues to be loss making. While revenue of £36.5m for 2017 was 52% ahead of 2016, the pre-tax loss widened to £14.3m from £12.5m. For 2018, analysts expect a 64% increase in revenue to £60m and a much-reduced pre-tax loss, followed by a small maiden profit in 2019. With £28.1m cash on its balance sheet, the company looks to be funded through to profitability.

The board expanded on its view that Abcam’s offer fundamentally undervalues Horizon. It said that the offer values Horizon’s enterprise value at a multiple of four times its forecast £60m revenue, compared with an average of 8.4 times for its key peers. I’m inclined to agree with Horizon’s board and I rate the stock a ‘buy’ on the basis of the company’s long-term potential or an increased bid in the near term.

Grey outlook

Shares of FTSE 250 firm Saga (LSE: SAGA), which Neil Woodford holds in his Income Focus Fund, have climbed 23% to 134.5p, from a low of 109.5p in late March. However, this recovery comes after a huge crash in the shares, following a shock profit warning late last year.

At the time, Woodford and his team were sanguine about what they described as a “more challenging trading environment in insurance broking… and the requirement for additional investment to drive growth.” However, with a 5% decline in earnings forecast for the company’s current financial year, giving a price-to-earnings ratio of 10.3 at the current share price, and minimal growth forecast for the following year, I don’t see a great deal of scope for further gains in the near term. And there’s always the possibility of a further profit warning.

Most analysts expect Saga to maintain its dividend at last year’s 9p level (giving a yield of 6.7%) and Woodford is also satisfied that the dividend is safe. While he’s said the same about a number of companies that went on to cut their payouts, I think it would take a serious deterioration in trading and/or need for investment for Saga not to be able to maintain its dividend. The yield may be attractive for investors seeking a high immediate income but, overall, this is a stock I’m avoiding, until I see evidence that the business is capable of delivering sustainable earnings growth at a decent rate.

The post The soaring Saga share price isn’t Neil Woodford’s only rocket appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But I for one am pretty darn chipper over the pharma play’s investment outlook, even if the market remains less than convinced.

Horizon Discovery announced that group revenues soared 19% during the six months to June, to £12.1m. Sales at its Products division increased 10% year-on-year to £5.3m, while over at Services, revenues leapt 30% to £6.8m.

On top of this, the gene editing specialist expects to gobble up future R&D milestones of up to £208m plus future product royalties from its Research Biotech arm, it said.

For the full fiscal year, Horizon Discovery expects the historical second half weighting (around 60% of sales are sourced during July-December), combined with its strong order book, to help generate organic revenues of between £30m and £33m.

The right medicine

It should come as no surprise that Darrin Disley, chief executive of Horizon, took a cheery tone on the back of the results, commenting: “We are very pleased with our progress in the first half of 2017, delivering consistent strong growth as the business continues to scale, and significant margin improvements as steps taken in 2016 to improve operational efficiencies bear fruit.” Gross margins expanded to 64% in the first half from 48% a year earlier.

And Disley lauded the recent $85m acquisition of Dharmacon in particular, saying that the move will “[create] a business which is the global leader in the application of both gene modulation and gene editing technologies.”

The City certainly believes in its hot revenues outlook and expects the business to end its long run of losses from next year onwards. It is predicted to flip from a loss of 3.7p per share in 2017 to earnings of 0.5p in 2018.

A forward P/E ratio of 478 times for next year may be unappealing for many investors. But for patient share selectors, this heady paper valuation may be worth swallowing for the prospect of blockbuster earnings growth in the years ahead.

Bet on this beauty?

GVC Holdings (LSE: GVC) is another London stock predicted to switch back into the black pretty soon.

In 2017 the abacus bashers are anticipating earnings of 62.4 euro cents per share, moving from the losses of 51 cents last year. And a further improvement, to 74.4 cents, is forecast for next year.

This shouldn’t come as a shock as the scale benefits created by the bwin.party acquisition last year, allied to its improving territorial diversification, bear fruit. Net gaming revenues at the gambling giant ripped 25% higher between January and June to €486.2m, a result that saw adjusted pre-tax profit double to €101.9m.

Despite GVC Holdings soaring 31% since the start of 2017, it still trades on a very attractive forward P/E ratio of 15.3 times. I reckon this is terrific value given the company’s colossal revenues opportunities.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended GVC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Shares in software company Kainos (LSE: KNOS) had a shaky first year after flotation, getting an EU referendum-linked hammering last June. But since then, momentum has been picking up and the price has soared by 85% in less than a year, to 230p — even after a 4% drop on results day Tuesday.

The response to the results looks like a common event — a high-flying growth company reports some unexciting figures, and the price drops. Are people right to be selling today, or are we looking at a buying opportunity?

Analysts did have a fall in earnings per share of 12% pencilled-in, and the actual figures depend on how you look at them — there was a reported 18% fall, which is worse than that, but adjusted EPS fell by only 10%, which was better.

Either way, it seems like a short-term trifle to me. The provider of digital services and platforms reported a 9% rise in revenues and analysts are predicting a return to EPS growth for the coming year, with it accelerating the year after. 

Global growth

Chief executive Brendan Mooney spoke of “strong growth in Digital Services, driven by demand from existing customers, new customer acquisition and geographic expansion,” and reckoned the firm is “well-positioned for growth in the coming years.“

This year’s earnings blip is at least partly down to “the funding challenge in the NHS,” but Kainos is expanding its global operations — a new office in Frankfurt brings its tally of European and US offices up to eight. And after the financial year ended, a new contract has seen the firm providing services to 38 US hospitals.

There’s a dividend too, up 5% and ahead of expectations, for a modest 2.7% yield — but it’s looking nicely progressive.

A Woodford punt?

One thing you can definitely say about Neil Woodford is that he’s not afraid of taking a blue-sky risk on companies that are not yet profitable — especially in the healthcare and biotechnology field. Horizon Discovery (LSE: HZD) is one, and though it only accounts for a tiny portion of his CF Woodford Equity Income Fund, he holds a number of similar picks.

I reckon Mr Woodford’s approach to blue-sky growth is sensible. It’s a very high risk strategy, and having a basket of different stocks should greatly improve your safety — and, after all, you really only need one or two to come good.

Horizon is into the very exciting field of therapeutic gene editing, and this month told us it “has gained exclusive worldwide rights to use a novel transposon-based technology platform that will broaden Horizon’s gene editing capabilities,” which was co-invented by its own head of innovation. It’s mainly funded by downstream royalty payments, so shouldn’t impact the cash position too much in the short term.

Jam soon?

Full-year results released Tuesday revealed a 19% rise in revenue to £24.1m, including a 45% rise in product revenue to £11.3m, and a gross margin boosted to 54%. So while there’s no profit yet (and none forecast for the next two years — though losses per share should be getting close to break-even before too long), I think these figures do provide appealing promise of profits within the next few years.

There are no meaningful fundamental ratios here, but if you’re prepared to take a bit of a punt, I see Horizon as having attractive potential.

The post Two momentum growth stocks that could help you retire wealthy appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

New small-cap buy Horizon Discovery (LSE: HZD) caught my eye, while Woodford’s team also had some interesting comments to make on the big pharma sector, as the fund dumped its holding in French group Sanofi and bought more shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US).

Blue chips

Drugs giants have long been core holdings in Woodford’s portfolios, as the master investor sees “a fundamentally undervalued industry”.

As the purchase of more GlaxoSmithKline and AstraZeneca testifies, Woodford’s sale of Sanofi doesn’t signal a change of heart on the sector. Sanofi is “simply a casualty of the competition for capital in the portfolio”. A good run up in the French firm’s shares provided an “opportunity to sell and reinvest in companies that we view as even more attractive in terms of long-term total return potential”.

Longstanding holding GlaxoSmithKline has been “frustratingly disappointing” for much of the time Woodford has held it.

“It is valued by the market as a struggling pharmaceuticals business — a view that we have some sympathy with because the pharma business [two-thirds of turnover] has performed poorly operationally”.

However, Woodford’s team reckons the market has got it wrong by failing to appreciate the other areas of Glaxo’s business: vaccines and consumer healthcare:

“In particular, the current share price dramatically underappreciates the value of ViiV healthcare, Glaxo’s specialist HIV business. We continue to see considerable inherent value in Glaxo, however, and believe the sum of the parts to be significantly greater than the whole”.

Glaxo’s shares were trading above £14 throughout May, when Woodford was buying, but you can currently pick them up below that level on a forward P/E of 17 with a dividend yield of 5.8%.

AstraZeneca’s shares are also cheaper now than during May. They’re currently trading at around £42.50 on a forward P/E of 15.5 with a 4.4% yield.

Woodford was disappointed with news during May that US group Amgen had terminated its partnership with Astra to develop psoriasis treatment brodalumab. However, Woodford’s team remain bullish on the UK company, maintaining that Amgen’s withdrawal “doesn’t undermine an investment case which is supported by an excitingly diverse pipeline of potential new therapies”.

Elsewhere, among the blue chips, Woodford was happy to continue adding to Centrica and Legal & General, as well as to mid caps Homeserve and IP Group.

Small caps

Woodford introduced a number of small caps to the fund during May. Some of these are unquoted companies or listed overseas (for example, Norwegian fingerprint technology business Idex), but some are more readily accessible to the average UK private investor.

The fund took “a small but extremely interesting position” in Verseon, a US-based but UK-listed firm that applies a physics-based approach to drug discovery, and also bought into AIM-listed Horizon Discovery, a life sciences business which supplies research tools and services to help translate the human genome and accelerate the discovery of personalised medicines.

Horizon Discovery did a placing at 190p a share to raise £25m at the beginning of May. Woodford’s participation in the placing gave him a stake in the company of over 11%. Horizon is currently loss-making (£5.9m last year), but the proceeds of the placing will enable the company to accelerate growth, and you can currently pick up the shares below the placing price; they trade at 180p, as I write.

The post Neil Woodford Buys Horizon Discovery Group PLC And More GlaxoSmithKline plc & AstraZeneca plc appeared first on The Twelfth Magpie.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Homeserve. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.