Should you dump AstraZeneca plc and buy BTG plc after 10% sales rise?

The Motley Fool

Specialist healthcare company BTG (LSE: BTG) has released interim results which show that it is making encouraging progress. Sales grew by 10% at constant exchange rates and there could be more growth to come over the medium term. Does this mean that BTG offers more investment appeal than sector peer AstraZeneca(LSE: AZN)?


Excellent long term prospects

BTG's sales may have risen by 10% on a constant currency basis, but with the positive impact of weaker sterling factored in BTG's revenue increased by 24%. This was boosted by the acquisition and integration of Galil Medical, which contributed 2% to revenue growth at constant exchange rates. Furthermore, BTG's Interventional Medicine revenue rose by 39% and the company has the potential to expand and capitalise on increasing opportunities within this space.

Looking ahead, BTG's plan to accelerate its growth strategy through the reinvestment of cash flow is likely to deliver impressive earnings growth. Although it means that operating profit was just 4% higher in the first half of the current year due to planned investments, BTG is forecast to record a rise in its bottom line of 10% in the current year. This is due to be followed up with growth of 36% in the next financial year, which shows that BTG remains a high-growth stock which has excellent long term prospects.

This contrasts with the outlook for AstraZeneca. It is continuing to endure a difficult period as a result of the loss of patent protection on key blockbuster drugs. Although the company has also reinvested its cash flow in the acquisition of new drug prospects and drug companies, AstraZeneca's near-term outlook is relatively poor. For example, in the current financial year it is expected to report a fall in earnings of 2%, followed by a decline of 4% next year.

Superior value for money

However, AstraZeneca offers significant growth prospects over the medium term. The company's balance sheet and cash flow can comfortably accommodate more debt which could be used to make additional acquisitions. This could further improve AstraZeneca's pipeline and allow it to report improved profitability in future years. And with AstraZeneca trading on a price-to-earnings (P/E) ratio of 13.1 versus 25.9 for BTG, it offers superior value for money at the present time.

In addition, AstraZeneca yields 5.1% from a dividend which is covered 1.5 times by profit. This indicates that even though AstraZeneca's profitability is expected to come under pressure, its shareholder payouts are highly affordable. In contrast, BTG pays no dividend and is likely to continue to reinvest cash flow for further growth.

Of course, BTG is a highly appealing buy right now. Although it has a higher P/E ratio than AstraZeneca, its price-to-earnings growth (PEG) ratio of 0.7 indicates that it offers capital gain potential. However, with its higher yield, scope to improve its pipeline and deliver improved financial performance over the medium term, AstraZeneca is the better buy right now.

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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and BTG. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.