Investment Column: Weak valuation and strong yield underpin the case for AstraZeneca

Clinton Cards; Inchcape
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The Independent Online

Our view: Hold

Share price: 3,080.5p (+39p)



There are some obvious reasons to buy pharmaceutical companies now. They are widely viewed as defensive investments that are less prone to the up and downs of the economic cycle. This helps when markets are gyrating and the economic outlook is grim.

But there are problems with this view. The most obvious is that it overlooks some important challenges faced by the sector, chiefly the hurdle of competition from generics as drugs come off patent. AstraZeneca is not immune from these dangers.

The FTSE 100-listed company faces an upcoming threat in the form of generic copies of Pfizer's Lipitor cholesterol treatment in the US.

This will present a challenge for Astra's Crestor cholesterol drug, which has been selling well. Yesterday's results showed its sales had climbed 14 per cent in the third quarter.

But Crestor could lose some steam as the generic comes onto the market. There is also the prospect of pricing pressure as debt-laden Governments in Europe ask for cuts to drug prices. So those are the challenges.

However, there are also opportunities. Astra is growing its clout in emerging markets. Yesterday, it also raised its target for its core earnings per share for the full year.

But again we weren't too pleased with the news that sales in emerging markets were up only 7 per cent in the third quarter, down from 10 in the second. The first quarter was even stronger.

Weighing against this is the fact that the stock is not exactly pricey. At around nine times forward earnings, Astra offers value and a very decent prospective yield of more than 5 per cent. In the end, this continues to look like a good investment – but not so good as to prompt us to increase our holdings. There are challenges, though none so severe as to warrant a "sell" view.

Clinton Cards

Our view: Sell

Share price: 11.75p (+1.25p)



There were no happy returns for Clinton Cards, the greetings card retailer, yesterday. The 641-store group posted a calamitous loss of £10.7m for the year to 31 July, hit by falling sales and impairment charges to property, plant and equipment, as well as onerous leases.

However, Clinton shares leapt after it unveiled a refinancing of its £55m debt facilities to July 2013.

Hopes in the City were also raised by news that its new chief executive, Darcy Willson-Rymer, is undertaking a review of the group's operations to improve its customer service, supply chain and online offering.

More crucially, the retailer said the review would cover its store portfolio, although Mr Willson-Rymer did not provide any numbers. Clinton had as many as 1,300 shops in 2005 but we believe it needs to keep on slimming.

Indeed, unless Clinton radically alters its business model – which the new boss could do – it has far too many stores for us to recommend the shares. This is also partly because the dire consumer spending environment shows no signs of getting better.

More strategically, we have concerns that Clinton relies on third-party suppliers for its cards, with 80 per cent coming from eight suppliers. This means the group has far less room for manoeuvre on margins than its highly profitable rival Card Factory, which makes its own cards. While the new boss may prove us wrong, we think he has a mountain to climb.

Inchcape

Our view: Buy

Share price: 339.1p (+17.9p)



The roads of Asia may not be paved with gold but they are proving prosperous for Inchcape, the retailer of cars from BMW to Porsche and Jaguar.

In an interim management statement published yesterday, the dealer said it continued to see an "uneven global recovery" with its business benefiting from "strong growth momentum" for luxury and premium vehicles in the Asia-Pacific region.

More specifically, it said it had a "stronger than anticipated" third quarter in Asia after its supply situation improved faster than it previously indicated in Hong Kong and Singapore.

However, Inchcape warned that consumer confidence in the UK and Europe had "further weakened", although this did not offset a 2.2 per cent rise in group revenues to £1.46bn from 1 July to 26 October.

The uptick helps offset the caution surrounding consumers in Western countries, showing that Inchcape has what it takes to perform despite the tough conditions.

Potential investors should also note that Inchcape described its financial position as "strong", not least because it expects to end 2011 with net cash of about £160m on its balance sheet.

Overall, there were no ugly surprises in the update. The investment case is made all the more attractive by the fact that shares in the group trade on a forward earnings multiple of just 8.5, which along with its emerging market growth leads us down the road of recommending them.

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