AstraZeneca and the world according to GARP

AstraZeneca PLC (LSE:AZN), the Anglo-Swedish pharmaceutical giant, stands as a quintessential example of a 'Growth at a Reasonable Price' (GARP) investment opportunity, according to Bank of America.

This strategy, which marries the principles of growth and value investing, seeks companies with consistent earnings growth that are not overvalued in the market.

AZ's current market position illustrates the GARP approach effectively. The company is trading at an attractive valuation of 13 times its estimated 2025 earnings per share (EPS), as noted by analysts at BofA. This valuation is considered reasonable within the pharmaceutical sector, especially given the company's robust growth prospects.

The company's forecast compound annual growth rate (CAGR) in EPS from FY25 to FY28 is 12%, indicating a strong potential for earnings growth. This is a key metric for GARP investors, who look for companies that combine financial solidity with promising future performance.

AZ's pipeline is a significant component of its GARP narrative. The company has a best-in-class mid-stage pipeline, which is expected to drive future growth. This includes near-term events like the 2024 EPS guidance and the Dato filing and approval, which are anticipated to clear the path for further growth.

Moreover, the company's comparative advantage in the European pharmaceutical sector is notable. Despite a quieter catalyst path compared to FY23, AstraZeneca's pipeline is busier relative to its peers, with significant developments in key areas like Imfinzi and Capivasertib.

Looking ahead, AZ faces potential challenges, such as patent cliffs for major drugs like Farxiga and Soliris. However, the progression of its pipeline into phase III starts is expected to mitigate these risks, a factor closely watched by GARP investors.

Financial forecasts further bolster the Anglo-Swedish giant's GARP credentials. The company's sales CAGR from 2025 to 2029 is projected to be around 8%, with FY30 sales anticipated to be approximately 16% ahead of consensus. This better-than-expected top-line growth could positively impact mid-term margins.

For FY24, BofA expects AstraZeneca to guide for low double-digit to low teens EPS growth, factoring in a 2% negative foreign exchange impact. This guidance, while slightly below consensus, aligns with the GARP strategy's preference for sustainable growth.

In afternoon trading, the AZ shares were trading sideways at 10,211.78p.

GARP, or Growth at a Reasonable Price, is an investment strategy that was popularised by legendary investor Peter Lynch. Lynch, who managed the Magellan Fund at Fidelity Investments between 1977 and 1990, achieved remarkable success and recognition through his unique approach to investing, which combined elements of both growth and value investing strategies.

Lynch's philosophy was centred on investing in companies that were growing earnings at a robust rate but whose stock prices did not fully reflect this growth due to various market factors.

This approach allowed him to identify stocks that offered both value and potential for significant growth, a balance that is at the core of GARP investing. Lynch detailed his investment strategies in his books, notably 'One Up On Wall Street' and 'Beating the Street', which have become essential readings in the world of investment.

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4 GARP Stocks to Scoop Up for Maximum Returns

Growth at a reasonable price, or GARP, is an excellent strategy to earn quick investment profits. The GARP approach helps identify stocks priced below the market or any suitable target determined by a fundamental analysis.

The strategy helps investors gain exposure to stocks with impressive prospects and trading at a discount. GARP stocks have solid chances regarding cash flow, revenues, earnings per share (EPS) and others.

A portfolio based on the GARP strategy comprises stocks that offer the best value and growth investment. NVIDIA NVDA, Global Industrial Company GIC, Sterling Infrastructure STRL and Dycom Industries DY are some GARP stocks that hold promise.

The GARP strategy offers ideal investment options utilizing the best value and growth investing features. Investors adopting the GARP approach prefer stocks priced below the market or any reasonable target determined by fundamental analysis. The stocks have solid prospects based on cash flow, revenues, EPS, etc.

Growth Metrics

A strong earnings growth history and impressive earnings prospects are the primary concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal rates, pursuing stocks with a more stable and reasonable growth rate is a tactic of GARP investors. The GARP strategy considers growth rates between 10% and 40% ideal.

Another metric considered by growth and GARP investors is the return on equity (ROE). GARP investors look for strong and higher ROE than the industry average to identify superior stocks. Moreover, stocks with a positive cash flow find precedence under the GARP plan.

Value Metrics

GARP investing prioritizes one of the popular value metrics — the price-to-earnings (P/E) ratio. The investing style picks stocks with higher P/E ratios than value investors, but it avoids companies with extremely high P/E ratios. The price-to-book value (P/B) ratio is also taken into consideration.

Using the GARP principle, we have run a screen to identify stocks that should offer solid returns in the near term.

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Along with the criteria discussed in the above section, we have considered a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Last five-year EPS & projected 3-5-year EPS growth rates between 10% and 40% (Strong EPS growth history and prospects ensure improving business.)

ROE (in the past 12 months) greater than the industry average (Higher ROE compared with the industry average indicates superior stocks.)

P/E and P/B ratios are less than the M-industry average (P/E and P/B ratios less than the industry indicate that the stocks are undervalued.)

Here are four of the five stocks that made it through the screen:

NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. The company currently flaunts a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

NVIDIA has gained 230.2% on a year-to-date basis. It has a trailing four-quarter earnings surprise of 18.99% on average. The Zacks Consensus Estimate for NVDA’s fiscal 2024 earnings has been revised upward by 2.5% to $11.01 per share over the past 30 days.

Global Industrial Company is an industrial distributor of industrial, and maintenance, repair and operation products in North America. The company currently sports a Zacks Rank #1.

Global Industrial Company has gained 61.8% on a year-to-date basis. It has a trailing four-quarter earnings surprise of 8.55% on average. The Zacks Consensus Estimate for GIC’s 2023 earnings has moved 2.2% north to $1.85 per share over the past 30 days.

Sterling Infrastructure operates through subsidiaries within segments specializing in E-Infrastructure, Building and Transportation Solutions that aid in developing large-scale site development systems and services projects, residential and commercial concrete foundation projects, and infrastructure and rehabilitation projects for highways, roads and bridges to name a few. The company currently carries a Zacks Rank #2.

Sterling Infrastructure has gained 98.1% on a year-to-date basis. It has a trailing four-quarter earnings surprise of 12.18% on average. The Zacks Consensus Estimate for 2023 earnings has moved 2.4% north to $4.19 per share over the past 30 days.

Dycom Industries is a specialty contracting firm operating in the telecom industry, offering diverse services such as engineering, construction, maintenance and installation services to the cable and telephone companies. The company currently carries a Zacks Rank #2.

Dycom has gained 7% on a year-to-date basis. It has a trailing four-quarter earnings surprise of 154.25% on average. The Zacks Consensus Estimate for fiscal 2024 earnings has moved 12.8% north to $7.30 per share over the past 30 days.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance.

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