While investors in AstraZeneca (LSE: AZN) have experienced a very strong 2014 thus far, with shares in the pharmaceutical major gaining 27%, its been a very different story for their counterparts in GlaxoSmithKline (LSE: GSK). Indeed, the latter has seen its share price fall by 10% since the turn of the year, with bribery allegations causing sentiment to weaken to a large degree. However, both companies could have very bright futures and may be worth buying for the following five reasons.
As mentioned, GlaxoSmithKline has experienced weak sentiment arising from allegations of bribery notably in China. However, with a fine of around 300 million being announced last week, sentiment in the stock could pick up as it seeks to draw a line under a challenging period for the company.
Meanwhile, with Pfizer having made three unsuccessful bid attempts earlier this year, AstraZeneca could benefit from further improved sentiment should more bids come along from Pfizer (or elsewhere) later in the year.
Although AstraZenecas pipeline has been under the spotlight in recent years, it is now very much on the up. A number of acquisitions have made the all-important difference and, with the company having the financial firepower to be more active in this space, sales could gain an even bigger boost in future years.
As ever, GlaxoSmithKline has a hugely diversified pipeline with huge potential. Now that the bribery allegations in China have been settled, it could cause investors to focus on the optimistic future sales potential of the company.
The pharmaceutical sector often attracts high valuations, with sector peer Shire trading at over 20 times earnings before it was bought by US rival, AbbVie. So, with GlaxoSmithKline trading on a price to earnings (P/E) ratio of just 15.2 and AstraZeneca having a P/E of 17, there appears to be upside potential from a rerating for both companies.
With yields of 5.6% (GlaxoSmithKline) and 3.7% (AstraZeneca), both companies are above the index average of around 3.3%. However, with strong sales potential resulting from upbeat pipeline prospects, dividends per share could rise at a brisk pace. As a result, the income prospects of the two companies could lead to buoyant demand for their shares, leading to higher share prices.
While there is undoubtedly vast growth potential on offer in the long run, GlaxoSmithKline and AstraZeneca also offer defensive qualities. During uncertain times, pharmaceutical stocks tend to outperform the wider index as they are seen as less dependent upon the economic cycle than many of their peers. So, with a beta of 0.9, both companies seem to offer defensive qualities as well as growth potential.
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Peter Stephens owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.