Shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) have made a strong start to 2015, with improving investor sentiment helping them to make gains of 11%. That’s a much better performance than the FTSE 100, which is up 2% since the turn of the year. And, looking ahead, further outperformance could be just around the corner.
Rationalisation
While GlaxoSmithKline’s management team are not magicians, they could create additional shareholder value over the next couple of years through their rationalisation plans. A key part of this would be the spin-off of GlaxoSmithKline’s HIV subsidiary, ViiV Healthcare, with it being likely to attract a significant amount of investor interest due to its excellent pipeline of drugs and very appealing growth prospects. As such, GlaxoSmithKline’s shareholders could see the value of their current holdings rise considerably over the medium term simply because of a splitting up of the company.
Cost Savings
While it is easy to talk about reducing costs, putting them into practice can be challenging. Of course, if they are successful then it can lead to increased margins and significantly higher profitability and, on this front, GlaxoSmithKline is making excellent progress. For example, it is on-track to make £1bn of cost savings over the next three years, with cuts due to be made to support functions, commercial operations, research and development, as well as manufacturing. As such, even a stagnant top line could lead to a bottom line that moves substantially higher over the medium to long term.
Pipeline
Although GlaxoSmithKline is not immune to the pressures of generic competition and the loss of the patents on key, blockbuster drugs, it has an excellent pipeline of new drugs that could easily offset short term challenges. And, with it having become more focused on research and drug development following the sales of consumer brands such as Lucozade and Ribena, GlaxoSmithKline appears to be better positioned than ever to dedicate capital to finding the next blockbuster drugs.
Looking Ahead
With investor sentiment picking up sharply in recent weeks, now could be the perfect time to buy GlaxoSmithKline. It has huge potential to deliver excellent share price gains over the long run, with it having significant scope to make cost savings, deliver on an impressive pipeline, and also create shareholder value via at least one spin-off and additional rationalisation plans.
As such, GlaxoSmithKline remains one of the most exciting stocks to own in the FTSE 100, with its price to earnings (P/E) ratio of 16.1 having the scope to move vastly higher over the medium to long term.