GlaxoSmithKline(LSE: GSK) is one of the most undervalued andunderappreciatedFTSE 100 companies, in my opinion. Glaxo is also difficult to understand.
On the face of it, many investors see the company as one of the UKs largest pharmaceutical companies, which is struggling to boost sales. However, theres more to Glaxo than meets the eye.
Indeed, while the company is best known for its big pharma roots, recent management initiatives to increase the groups presence in the consumer healthcare market have turned Glaxo into a quasi-consumer goods company, with an added income stream from pharmaceutical products.
Consumer healthcare
Glaxos consumer health division is one of the worlds largest consumer health product suppliers, producing a range of over-the-counter medicines and skin treatments. Income from this unit is relatively stable and predictable. The same can be said for Glaxos vaccines unit.
On the other hand, Glaxos respiratory business is more unpredictable. Many of Glaxos troubles over the past few years can be traced to the groups respiratory business.
Last years $20bn deal with Novartis will see Glaxo become the worlds leading consumer healthcare company through a joint venture.The deal saw Glaxo dispose of its oncology portfolio for$16bn while acquiring Novartis global Vaccines business for $5.3bn.
Glaxo and Novartis are creating anew consumer healthcare joint venture, with 2013 pro forma revenues of 6.5bn. Glaxo will have majority control of thisworld-leadingconsumer healthcare business with an equity interest of 63.5% and the option tobuy out the remainder after three years.
Theres also plenty ofvaluetrapped in the rest of the Glaxo group.
Glaxos ViiV Healthcare HIV joint venture with Pfizer could be worth around 7bn and Glaxo holds an equity interest in South Africas generic pharmaceutical producer Aspen Pharmacare. On top of these interests, Glaxo has40 new drugs under development in its treatment pipeline.
Fire up growth
All of the above factors will fire up Glaxos growth over the medium term. Group revenue is expected to grow at a compound annual growth rate of low-to-mid single digits over the five years from 2016 to 2020.
Over the same period, core earnings per share are expected to expand at a rate in the mid-to-high single digits.
But despite these growth projections, Glaxos defensive consumer healthcare business, its treatment pipeline and lucrative joint ventures, Glaxo is the cheapest big pharma group by far.
Cheapest of the pack
Glaxos peers, including the likes ofNovartis, Pfizer, Roche and Sanofi all trade at an average forward P/E of 21.1. Glaxo trades at an average forward P/E of 18.1. Whats more, based on City earnings estimates for 2016 and 2017, Glaxo is currently trading at a valuation discount of 30% to its wider peer group.
Other valuation metrics also show the same kind of discount. Using the enterprise value to earnings before interest and tax or EV/EBIT metric, Glaxo is trading at a discount of 50% to its wider peer group on both a forward and current basis. These figures indicate that Glaxo should be trading 30% to 50% above current levels, in the region of 1,790p to 2,069p per share.
To complement this upside, Glaxo currently supports a dividend yield of 5.8% soinvestorswill be paid to wait for the companys return to growth.
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Rupert Hargreaves 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.