On 6 May we attended the consumer part of GSKs investor event, hosted by Emma Walmesley, CEO of GSK Consumer Healthcare, analysts at Royal Bank of Canada wrote in research published today, adding that in many respects it was just like any other consumer company presentation.
Consumer healthcare generates about 20% of GlaxoSmithKlines (LSE: GSK) revenues, and marginally contributes to its valuation, which is more appealingthan that of consumer staples such as Unilever (LSE: ULVR) andDiageo (LSE: DGE),Id argue. Heres why.
Glaxo is more profitable than Unilever, with forward operating margins expected to be in mid-20s into 2016. And whilst its less profitable than Diageo, its financially stronger.
Revenues are unlikely to grow much, and thats not too different an outlook from that of Diageo and Unilever.
Glaxos forward yield is forecast to hover around 5%5.5% between 2015 and 2017 and such forecasts are accurate, in my view.At 21x and 11x forward earnings and adjusted operating cash flow, respectively, its stockcould be considered as part of a diversified portfolio, although its earnings per share could come come under pressure this year.
The stock is up 4% so far in 2015, but has lost 12% of value over the last month, asanalysts have become more bearish about its short-term earnings prospects. If you are after long-term value, theres little you should worry about at this price, however.
Finally it has long been debated whether Glaxo should hold less cyclical consumer assets, and upside could certainly come from spin-offs. Investors are nervous, though, and a change of management would benefit Glaxos own valuation.
Unilevers forward operating margins are expected to be in the range of 15% this year and next.Revenues maygrow at a faster pace than at Glaxo and Unilever, but the price to pay for a steeper growth rate is a lower forward yield, in the region of 3%, although thatis based on sustainable cash flows.
At 21x and 14x forward earnings and adjusted operating cash flow, respectively, Unilever is less attractive than Glaxo, but is a more promising investment than Diageo, based on the conditions of its end markets and the lower level of cyclicality of its core products.
Unileversshares have risen 11% in 2015, but they are down 2% in the last month of trading. One element to consider is that with Unilever youd likely add less risk to your portfolio than with Glaxo.
Diageos forward operating margins are expected to be very close to 30% in the next couple of years, but I am concerned about its growth rate for revenues, which will likely be a drag both on margins and on its equity valuation.
A generous dividend policy and relatively high leverage render Diageo a less appealing investment than Glaxo and Unilever. Its shares have lost 2% of value this year, and about 4% in the last four weeks.
At 3%, its forward yield also signals risk rather than an enticing yield opportunity, based onfundamentals.
At 21x and 15x forward earnings and adjusted operating cash flow, Diageo is less attractive than Glaxo and Unilever, unless it manages to grow at a faster pace via acquisitions but that, in turn, would heighten the its risk profile.
So, you’d do well to avoid Diageo, hold Unilever and add exposure to Glaxo. That said,asmaller pharma growth and value playplay could beat them all, given that it promises much higher returns than Glaxo.
A rather defensive play with a decent cash position and an attractive valuation, this gem could deliver capital gains higher than 50% if it just manages to repeat the outstanding performance that it has recorded in recent years. Recent weakness in its share price signals an attractive entry point, based on the fair value of its assets.