Revenue expectations fail to excite

Feb 16 2009 by Andrew J Miller, The Journal

ASTRAZENECA: AstraZeneca recently reported its Q4 and FY2008 results. Despite 2008 EPS coming in ahead of our expectations, driven by exchange rate movements, the market was a little disappointed by its guidance for 2009.

Revenues are expected to be flat year-on-year in constant currencies while the management announced a more wide-reaching restructuring in an effort to drive EPS growth. Guidance is for EPS of $5.15-$5.45 in 2009 from the $5.10 earned in 2008. There was little detail in terms of pipeline progression although there was a small setback on one of the development drugs. Overall, the results were decent, the outlook a little disappointing, albeit possibly conservative (AstraZeneca had to constantly revise up 2008 EPS throughout the year from its initial guidance at FY results) and we have seen a couple of downgrades recommended and a couple of upgrades, on the back of the results.

AstraZeneca is trading on around 7 times 2009 EPS providing a 6% yield. We feel that while the story may not be that exciting in the short term, the relatively inexpensive valuation provides some downside protection as do the defensive characteristics of the pharmaceutical sector.

As such, we see the share price reaction as excessive, possibly more an indication of the strong share price performance over the past 12 months driving investors’ expectations too high. We retain our outperform recommendation and would be buyers on weakness.

Vodafone: Recent results have come in over 10% ahead of consensus expectations at the top line, allowing the company to reiterate underlying guidance for the full year and even raise headline guidance due to FX gains. Within the mix, mobile data growth of 25% was especially impressive after a flat second quarter. From a regional perspective, there were market share gains in UK, Germany and Italy, helping to offset some of the impact from weakening European economies. Our full year forecasts potentially look a little conservative on the back of the announcement with consensus earnings likely to settle between 14.5p - 15p. This would put the stock on under 9 times with a 7% dividend yield. The company has recently confirmed that it intends to grow the dividend progressively and financing still looks secure. Vodafone remains our preferred UK telecoms stock and our Buy recommendation and portfolio overweight position remains.

Andrew J Miller is regional centre head for Barclays Wealth