Its been a disappointing 12months for shareholders of GlaxoSmithKline (LSE: GSK).
A planned 4bn capital return has been slashed to just 1bn, and the pharma giants share price has lagged those of its peer group quite badly:
Company |
12-month share price movt. |
GlaxoSmithKline |
-9% |
AstraZeneca |
-3% |
Shire |
+11% |
Pfizer |
+15% |
Novartis |
+23% |
Amgen |
+35% |
Eli Lilly |
+36% |
Glaxo has also underperformed the FTSE 100 over the last five years, climbing 14% versus 26% for the blue-chip index.
However, every cloud has a silver lining. In Glaxos case, I believe that the firms underperformance could be a strong buying opportunity.
A long game
Glaxos current woes are due to a shortage of major products to replace the falling revenues from products such as respiratory drug Advair, which have lost patent protection.
First-quarter core earnings per share were down by 16% on a constant exchange rate basis, and Glaxos full-year outlook is for a decline in the high teens. Over the last year, cash flow has weakened and exchange rate factors have worked against the firm.
The firms complex cash and asset-swap transaction with Novartis should have resulted in a 4bn (80p per share) cash return to shareholders. In May,this was reduced to 1bn (20p per share) in order to protect Glaxos credit ratings and improve its financial flexibility. None of this has helped Glaxos share price, but the company expects to report significant growth from 2016 onwards, and I believe that investors need to share this longer view.
Developing major new pharmaceutical products isnt fast or predictable, but it can result in big wins. Take this weeks news that US firm Eli Lilly has an experimental product, solanezumab, that could be a major breakthrough in the treatment of Alzheimers.
Some estimates suggest that if further trials are successful, this product could generate sales of $11bn per year. Alternatively, it may join the long list of failed Alzheimers treatments. Theres no way of knowing, which is why major firms like Glaxo and Eli Lilly always have many more products under development than they expect to commercialise.
Backed by top investors
Im confident that Glaxos pipeline of new products will deliver some successes over the next few years. I also believe the potential of firms existing assets, such as the ViiV Healthcare HIV business and Glaxos vaccines division, is not currently reflected in Glaxos share price.
Thats a view shared by top UK fund manager Neil Woodford. The view of Mr Woodfords fund, which has added to its Glaxo holding in recent months, is that Glaxos individual divisions are collectively worth significantly more than Glaxos current market value.
Not expensive
The final point to note is that Glaxo does not look expensive at todays valuation. The firms shares trade on a 2016 forecast P/E of 15.5 and on about 13 times average earnings per share from the last five years.
This years 1bn cash return means that the shares offer a prospective yield of 7.4% for 2015, falling to 5.9% for 2016 and 2017, when Glaxo is planning to pay a dividend of 80p per share.
I’m not alone in rating Glaxo as a strong buy, either. The group was one of just five shares chosen by the Motley Fool’s top stock pickers for their latest income report, “5 Shares To Retire On“.
The Fool’s experts believe Glaxo is “taking the right steps to adapt” and rate the stock a buy.
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Roland Head owns shares of 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.