For any company, the quality of its management is crucial to its long-term success. A great CEO can make a huge difference and have a positive impact on the company’s bottom line. As such, a change in the man or woman at the top of a business could be viewed as a major risk to its investors, since the newcomer may fail to repeat the level of success that came before them.
That’s why GlaxoSmithKline (LSE: GSK) CEO Sir Andrew Witty’s planned retirement from the business in March 2017 is a factor that needs to be taken into account before buying a slice of the healthcare major. Not only has he been in charge for almost a decade, but in that time Sir Andrew has gradually improved GlaxoSmithKline so that it’s now a very strong business with three highly appealing segments. All of them offer long-term growth potential and together reduce the overall risk of the business.
Looking ahead, GlaxoSmithKline is expected to grow its bottom line by 16% in the current year and by a further 4% next year. This rate of growth is at least partly due to implementing the strategy employed by the company and Sir Andrew Witty is a key part of that. While his successor may prove to be very capable of continuing the work he’s done, there’s a chance at least that the company’s progress may be held back somewhat by a less optimal strategy.
No quick decisions
Countering this risk, however, are a number of factors. Chief among them is the fact that GlaxoSmithKline has a considerable amount of time to find the right person for the job. In other words, a quick decision won’t be necessary since there are still 10 months until a new CEO will start work at the company. Furthermore, GlaxoSmithKline has a strong wider management team and with its three segments having huge long-term potential, it seems to be in excellent shape to deliver strong growth numbers in the coming years.
For example, it has a very healthy pipeline of around 40 potential treatments, with its ViiV Healthcare division in particular having bright prospects. In addition, its consumer brands provide a degree of stability since they enjoy a relatively high degree of customer loyalty and so are able to help counteract the volatile patent cycle of the pharmaceutical industry. And with GlaxoSmithKline’s vaccines segment also having growth potential, the overall trajectory of the company is one of growth.
With the company trading on a price-to-earnings (P/E) ratio of 16.9, it appears to offer good value for money given its upbeat growth prospects. Certainly, a change in CEO brings a degree of risk whatever the company, but with GlaxoSmithKline having such a strong business model, a wide margin of safety and a yield of 5.4%, it seems to be an excellent buy due to its highly enticing risk/reward ratio.