The Buy Case For GlaxoSmithKline plc Is Getting Stronger Every Day

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is looking more and more attractive as an investment every day.

Indeed, as the company’s share price continues to decline, following the release of its downbeat half-year results, Glaxo is getting cheaper and cheaper. 

Undervalued

Glaxo’s shares are now trading at a 52-week low and for this reason the company looks significantly undervalued in comparison to its peers.  In particular, the average P/E of Glaxo’s major international peers, including Eli Lilly, Merck, Pfizer, Roche and Sanofi is around 23.7.

At present, Glaxo is only trading at a historic P/E of 13.5.

Further, Glaxo’s London listed peer, AstraZeneca (LSE: AZN) (NYSE: AZN.US) is currently trading at a historic P/E of 14.9 and forward P/E of 17.6, which makes Glaxo’s valuation look even more appealing.

Then there’s Glaxo’s dividend yield, which currently stands at 5.3%, compared to Astra’s 3.7%. Oh, and I can’t forget Glaxo’s proposed return of cash to investors, scheduled to take place next year.

Specifically, Glaxo’s recent deal with Novartis netted the company £4bn, which management has promised to return to investors next year. The cash return will come as a one-off payout via a B share scheme of approximately 80p per share.

Behind the valuation

Glaxo’s low valuation can be blamed on the company’s recent downbeat half-year report. The group reported that second quarter core operating profit plummeted 25%, or 14% on a constant exchange rate basis. Turnover fell 13%, or 4% at constant exchange rates, while core earnings per share fell 25% to 19.1p.

Nevertheless, aside from these poor headline figures, Glaxo did make solid progress throughout the first half of the year. The sales of new HIV treatments jumped 13%, while pharmaceutical and vaccines sales rose 11% within emerging markets.

Additionally, Glaxo’s pipeline of treatments under development remains substantial, with over 40 new treatments in late stage development. Then there is the company’s aforementioned deal with Novartis, set to complete during the first half of next year.

The deal will see Glaxo dispose of its oncology portfolio for $16bn, while acquiring Novartis’ global Vaccines business for $5.3bn.

Further, as part of the deal Glaxo and Novartis will create a new Consumer Healthcare business, with 2013 pro forma revenues of £6.5 billion. Glaxo will be the majority shareholder in this venture.