It has been a rough year forGlaxoSmithKline (LSE: GSK) andAstraZenecas(LSE: AZN) investors.
After a flurry of bid activityand rumours last year, it been a relatively quiet year for both companies as they double-down on their strategies to boost sales.
However, while these two pharma giants are working flat out to return to growth, the market is losing patience. Since the end of March, Astra and Glaxos shares have declined by 17.4% and 18.3% respectively, excluding dividends. Over the sameperiod, the FTSE 100 has lost 8.3%.
But after these declines, Glaxo and Astra now look to me to bethemost undervalued companies in the UKs leading index!
Slow and steady
Claiming that Glaxo and Astra are the two most undervalued companies in the FTSE 100 is a bold statementto make. Nonetheless, these two groups exhibit all the traits of classic contrarian value investments.
And when compared to some of the other FTSE 100 companies that have underperformed this year, the likes ofHSBC,Shell,BHPandGlencore, the two biotechs look to be vastly superior.
For example, Glaxo and Astra are still highly profitable. Glaxos operating margin was 50.5% for 2014 and Astrasis expected to report a net profit margin of 22.4% for 2015.
Whats more, the two biotechs have pricing power, and, as a result, a certain degree of control over future profits. HSBC, Shell, BHP and Glencore are all subject to market forces when it comes to product pricing.
Then there are Glaxo and Astras R&D initiatives to consider.
Research and development
Philip Arthur Fisher is widely regarded as one of the best growth investors of the last century. His bookCommon Stocks and Uncommon Profits is still in print today nearly six decades after it was published.
Fishers strategy was simple; buy undervalued growth stocks and hold for the long term. Now, trying to find tomorrows winners today is difficult, but Fisher was able to succeed by hunting out the companies that were spending heavily on R&D. In Fishers own words:
If the company is deliberately and consistently developing new sources of earning powerthe price-earnings ratio five or ten years in the future is rather sure to be as much above that of the average stock as it is todayThis is why some of the stocks that at first glance appear highest priced may, upon analysis, be the biggest bargains.
Firms that continually invest for future growth will, over the long-term, achieve better returns for investors than those companies that are focused on boosting short-term profits.
Glaxo and Astra are both investing heavily for the future.
Specifically, Glaxohas 258 new products under development more than any other big pharma group. Around 40 of these products are in advanced clinical trials and management expects at least half of its drugs currently under development will be on the market by 2020.
Astra has 222 new products in its treatment pipeline, several of which are expected to be blockbusters.City analysts believe that these new blockbuster treatments will produce sales for the group of around $4bn per annum by 2018.
The bottom line
So overall, Glaxo and Astra may have underperformed this year, but explosive growth could be just around the corner.
Investors will be paid to wait for this recovery asAstra currently supports an attractive dividend yield of 4.5% and Glaxo yields 6.3%.
Dependable dividends are not easy to find, there are plenty of companies out there that have cut their payouts at a moment’s notice.
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Rupert Hargreaves owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and HSBC. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.