It’s been a slightly uncomfortable year for GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) shareholders, who have watched their firm’s shares underperform the FTSE 100 by a significant margin, falling 17% compared to the FTSE’s more modest decline of 5%.
A year isn’t very long, but Glaxo hasn’t done very well over the last five years, either: as I write, Glaxo’s share price is just 3% higher than it was five years ago. That’s pretty poor, considering that the FTSE has gained 23% over the same period.
A bad year?
In fairness to Glaxo, it’s only really in 2014 that the pharma firm has seriously dropped behind the wider market.
The year started quite well, with news of a complex asset-swap deal with Novartis, which should strengthen both companies’ portfolios when it completes in the first half of next year.
The deal also includes an 82p per share capital return for Glaxo shareholders, and was well-received by the market.
News of a Serious Fraud Office into the firm’s sales practices was less impressive, but markets tend to brush over this kind of misconduct unless it affects the bottom line.
The real problem…
The real trouble started in July, when Glaxo published its interim results. Operating profit fell by 27% during the first half of the year, while earnings per share were down 34%. Although these falls were made worse by currency fluctuations, the underlying figures weren’t great, either.
Glaxo warned that a lack of free cash flow meant that share buybacks were likely to tail off during the second half of this year, and said that full-year adjusted earnings were no expected to be similar to 2013.
The shares fell by 12% in two weeks.
Will 2015 be better?
The pharma business can be very profitable: the UK’s three biggest firms, Glaxo, AstraZeneca and Shire have an average operating profit margin of 25%.
Both Glaxo and AstraZeneca have struggled to overcome the impact of patent expiration on key products over the last couple of years, and this may continue to affect earnings for a little longer. However, I’m in no doubt that the medium to long-term outlook for big pharma stocks is very attractive: this remains a genuine growth sector.
Seen in this light, Glaxo’s 2015 forecast P/E of 14.3 and prospective yield of 6.0% look extremely tempting, and the firm remains on my buy list for 2015.