While taking a long term view can lead to great success when it comes to investing, there comes a point at which exiting lacklustre investments may be a sound move. That's especially the case if the outlook for the business is rather downbeat and there are better options to generate capital gains available elsewhere.
Although many investors may feel that AstraZeneca(LSE: AZN) falls into that category owing to its declining profitability, the company's future remains very bright. Certainly, its bottom line has slumped by over 40% in the last four years and is expected to decline by a further 7% this year, but it has the potential to deliver significantly improved performance in the coming years.
That's mostly because of its current strategy in attempting to overcome the patent cliff that's causing the loss of vast swathes of sales of its key, blockbuster drugs. AstraZeneca has engaged in M&A activity and has the cash flow and balance sheet to continue to do so in the coming years. This should provide it with a growth in sales and profitability, with a flatline in its bottom line for next year highlighting the improvements being made.
While the process of turning AstraZeneca around is a rather gradual one, it offers excellent income prospects in the meantime. For example, it yields 4.9% and with shareholder payouts being covered 1.4 times by profit, it seems to have sufficient headroom to raise dividends in the coming years.
Better Options Elsewhere?
Of course, there are other options in the healthcare sector that also hold considerable appeal for long-term investors. For example Shire(LSE: SHP) is expected to increase its bottom line by 12% in the current year and by a further 16% next year. And while its deal to merge with Baxalta provides a degree of uncertainty regarding its future performance, its current margin of safety appears to be sufficiently wide to merit investment. For example, Shire trades on a P/E ratio of 12.3, which indicates that an upward rerating is on the cards.
Similarly, Hikma Pharmaceuticals(LSE: HIK) is expected to post excellent profit growth in 2017 following what is expected to be a rather disappointing 2016. In the current year its bottom line is due to fall by 9%. But with growth of 31% pencilled-in for next year, it seems likely that investor sentiment will improve following a tough 12-month period that has seen its share price fall by 16%. That's especially the case since Hikma has a price-to-earnings growth (PEG) ratio of just 0.5, which indicates that it offers upbeat growth prospects at a very reasonable price.
While Shire and Hikma have better growth prospects for the next couple of years, AstraZeneca continues to offer stunning long-term turnaround potential. And with it having a yield of 4.9%, versus 0.6% for Shire and 1% for Hikma, it remains a superior income play that could become a bid target if its share price continues to offer lacklustre performance over the medium term. As such, and while Shire and Hikma are appealing, AstraZeneca seems to be the preferred option of the three healthcare plays for the long term.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.