Life as a shareholder of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has not been particularly rewarding of late. For example, shares in the pharmaceutical major have risen by just 12% in the last five years, which is behind even a disappointing FTSE 100 rise of 18% in the same time period. However, now could be the start of a much more prosperous period for investors in GlaxoSmithKline, and this could be the right time to buy.
Declining Sentiment
Slowing sales growth and bribery allegations have been two of the major reasons for the decline in investor sentiment in recent years. Certainly, the problems that GlaxoSmithKline has faced in regard to generic competition are not unique, with a number of other global pharmaceutical stocks also struggling to replace key, blockbuster drugs that are moving off-patent and coming under threat from generic competition.
And, in GlaxoSmithKline’s case, it has felt the effects of this to a lesser extent than many of its peers, with its top line holding up reasonably well during the last five years relative to peers such as AstraZeneca. In fact, while GlaxoSmithKline’s sales have fallen by 13% during the period, AstraZeneca’s are down by 26%, and yet AstraZeneca’s share price is up a whopping 55% in the last five years.
Clearly, the bribery allegations and subsequent fine of around £300 million in China have weighed heavily on investors’ minds. This dominated GlaxoSmithKline’s news flow last year and has been a big contributor to its disappointing share price performance.
Looking Ahead
However, GlaxoSmithKline has bright prospects following a challenging period. Its drug pipeline remains a major draw for investors and its ViiV Healthcare division, for instance, has the potential to deliver multiple blockbuster drugs for HIV. In fact, it could be spun off from GlaxoSmithKline, such is its long term potential.
And, looking ahead to next year, the company is forecast to grow its top line by 3.1% which, although not spectacular, shows that it is set to move in the right direction after years of declining sales. Of course, generic competition will not go away, but GlaxoSmithKline seems to have the arsenal (via its pipeline) to overcome patent losses over the medium to long term.
Furthermore, GlaxoSmithKline continues to be relatively financially sound. For example, while its balance sheet does carry considerable debt, its vast profitability ensures that interest payments remain very well-covered at over 9 times and, as a result, it appears to have the financial firepower to continue to invest heavily in its pipeline and even conduct significant M&A activity.
Valuation
Having risen by just 12% in five years, shares in GlaxoSmithKline trade on a relatively appealing valuation. While earnings growth is forecast to be lacking this year, the company’s bottom line could rise at a brisk pace over the medium term, with 2016 set to see it grow by around 6%. As such, a price to earnings (P/E) ratio of 15.3 seems to be well worth paying for a company that has such a bright long term future. As a result, now could be a great time to buy GlaxoSmithKline.