Is Now the Time to Buy Shire?
Mar 1st 2013 10:35AM
Updated Mar 1st 2013 11:20AM
LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at Shire to determine whether you should consider buying the shares at 2,073p.
I am assessing each company on several ratios:
- Price/Earnings (P/E): Does the share look good value when compared against its competitors?
- Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
- Yield: Does the share provide a solid income for investors?
- Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
The consensus analyst estimate for this year's earnings per share is $2.20 (8% growth) and dividend per share is $0.24 (53% growth).
Trading on a projected P/E of 14, Shire appears slightly more expensive than its peers in the Pharmaceutical & Biotechnology sector, which are currently trading on an average P/E of 14.5.
Shire's P/E and high single-digit growth rate give a PEG ratio of approximately 1.8, implying the share price is expensive for the near-term earnings growth the firm is expected to produce.
Unfortunately, Shire offers only a 0.5% yield, significantly below the sector average 4.8%. Shire's three-year compounded dividend growth rate of 15%, while impressive, implies the yield will continue to lag behind that of its peers for some time.
That said, the consensus analyst estimate for Shire's dividend this year is $0.24 per share, which will bring the yield up to 0.8%. Indeed, the current dividend is more than 13 times covered by earnings, giving Shire plenty of room for additional payout growth.
Lastly, Shire is committed to returning cash to shareholders and recently announced a $500 million share buyback for this year.
So, is now the time to buy Shire?
Shire is a biotechnology company that is focused on the research and development of treatments for rare diseases.
Shire's treatments are highly specialized and the company has very few direct competitors. Indeed, unlike its peers in the biotechnology sector, which are experiencing falling sales due to the loss of patents, Shire registered a 12% rise in sales during 2012.
That said, Shire's lucrative products are attracting greater attention from rivals. In particular, the company reported sales declining 20% during 2012 for its speciality ADHD treatment Adderall, after a generic version of the treatment was released by a competitor.
In addition, Shire is facing potential legal action regarding several of its products and, recently, the company was fined $58 million by the U.S. government for illegal sales and marketing practices.
Nonetheless, Shire continues to be highly cash generative and during 2012, the company generated $1.4 billion of profit from $4.4 billion of sales. Furthermore, Shire finished its 2012 financial year with a net cash balance of nearly $400 million.
So overall, based on the firm's solid cash generation, current P/E valuation and highly lucrative products, I believe now looks to be a good time to buy Shire at 2,073 pence.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
The article Is Now the Time to Buy Shire? originally appeared on Fool.com.Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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