Investors in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) have endured a challenging year thus far. Shares in the pharmaceutical major have fallen by 13% since the turn of the year, with bribery allegations and a subsequent fine of just under 300 million causing sentiment to weaken.
In addition, pressure from generic drugs has hurt GlaxoSmithKlines top and bottom lines during the course of the year, with blockbuster respiratory drug, Advair, set to come under further pressure from generic drugs over the medium term.
However, GlaxoSmithKline could prove to be a great investment at its current share price and, perhaps more importantly, could beat the FTSE 100 in 2015. Heres how.
Although GlaxoSmithKline is due to hold dividends at their current level next year, it remains a hugely appealing income stock. Thats because it currently has a yield of 5.7% and, as a result, could prove highly enticing to income seeking investors. Indeed, while interest rate rises were expected to take place imminently, low inflation means that the Bank of England could hold rates lower for longer. This means that high-yielding stocks, such as GlaxoSmithKline, could see demand for their dividends increase next year, which could have a positive impact on the companys share price.
As the company discussed in its recent results, there is scope for GlaxoSmithKline to undergo significant restructuring. One option could be a spin-off of the companys HIV unit, ViiV Healthcare. This could create value for shareholders since ViiV is experiencing impressive growth levels and strong pipeline potential. Indeed, ViiV has eleven HIV medicines alongside Trumeq and Tivicay, the companys two newest HIV medicines and the separation of the unit from GlaxoSmithKline could cause an improvement in investor sentiment over the short to medium term.
Clearly, top line growth is proving to be a challenge for GlaxoSmithKline to overcome, with it expected to fall by 12% in the current year, before recovering by 6% next year. However, the companys bottom line could be buoyed by a significant cost cutting programme whereby GlaxoSmithKline is expecting to reduce costs by 1 billion over the next three years. As such, there is expected to be earnings growth of around 3% next year, which is a vast improvement on this years anticipated fall of 17%.
With shares in the company trading on a price to earnings (P/E) ratio of 15.1, they seem to offer good value for money when compared to other higher rated pharmaceutical companies such as AstraZeneca (16.7) and Shire (19). As a result of this potential for an upward rerating, as well as its income appeal and the potential for cost savings and a major restructuring, GlaxoSmithKline could have a far stronger 2015 than 2014 and, as such, could beat the FTSE 100.
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Peter Stephens owns shares of GlaxoSmithKline and AstraZeneca. 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.