It's been a hugely challenging few years for AstraZeneca(LSE: AZN). The pharmaceutical company has experienced a loss of patents on a number of key drugs. This has allowed generic competition to eat away at its sales, which has caused a severe fall in its profitability. In fact, its bottom line has declined by 37% in the last four years. Although it is set to fall again this year, a brighter future may be ahead for the business. As such, it could be worth buying right now.
A changing business
Under its current management team, AstraZeneca has pursued a strategy of acquisitions. This has strengthened its drug pipeline and created a business which has growth potential in the long run. The acquisitions it has made have been a sound use of cash, with it focusing on areas such as diabetes that could prove to be a major growth area in future years.
Looking ahead, more acquisitions could be on the cards. The company has a sound balance sheet and excellent cash flow. Together, they mean that it could increase significantly in size to accommodate other businesses. This could not only boost its financial performance, but also improve investor sentiment in order to generate a higher rating for its shares.
After a number of years of falling profitability, AstraZeneca is expected to record positive earnings growth in 2018. While an anticipated rise in earnings of 2% next year is hardly exceptional, it would represent tangible progress for the business. This in itself could mean the stock is worthy of a higher price-to-earnings (P/E) ratio than its current 15.5. And with a number of other pharmaceutical companies having significantly higher ratings, it would not be difficult to justify a higher valuation.
Higher profitability is also likely to lead to greater dividend payments over the medium term. Currently, the stock yields 4.9% from a dividend which is covered 1.3 times by profit. A growing dividend could act as a further positive catalyst and mean that the company's total returns improve in future. As such, now could be the perfect time to buy it.
Also offering upside potential is banking and financial services company Secure Trust Bank(LSE: STB). It reported encouraging results on Tuesday which show that the changes it is making to its business are starting to bear fruit. For example, its profit before tax increased by 11%, while its overall loan book increased by 34% and customer deposits increased by 27%.
The company is expected to report a rise in its bottom line of 9% in the current year, followed by further growth of 33% next year. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 0.3, which suggests it offers a wide margin of safety. And with a dividend yield of 4.4% from a payout which is covered 1.9 times by profit, its income prospects continue to be robust. After a 17% share price fall in the last year, it could be worth buying.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended 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.