GlaxoSmithKline (LSE: GSK) has endured five tough years, with patents expiring on a number of its big money-spinners and competition from generics. However, the overall trend of its share price has been generally upwards since late 2015, as the market has begun to look ahead to a brighter future of top- and bottom-line growth.
The shares have taken a dip from near £17 in March to around £15.50 today. Is this the last chance to buy a slice of the business for under £16? I can see two scenarios, both of which persuade me that the shares are excellent value at their current level.
Scenario #1
Glaxo’s Q1 results this week — the first to be presented by new chief executive Emma Walmsley — showed rising sales across all three of the group’s businesses: namely, pharmaceuticals (which includes the fast-growing HIV division), consumer healthcare and vaccines.
This diversified model is the legacy of former boss Andrew Witty, and many investors appreciate it because the steady revenues from the consumer business provide a counterbalance to the slightly more lumpy sales (and discovery) of drugs. The group is in good shape, with Ms Walmsley reiterating previous guidance of annual earnings growth in mid-to-high single digits through to 2020.
Analysts’ forecast earnings for the current year give a price-to-earnings (P/E) ratio of 14. This looks cheap to me, in view of the company’s medium-term guidance on earnings growth and a dividend yield of over 5% on top. All things being equal, I would expect the shares to continue their overall upward trajectory, as the market further warms to the group’s prospects.
On the question of whether this is the last chance to buy the shares at under £16, it’s perhaps worth noting that even if the price were to remain at its current £15.50 for the next 12 months, the value of your investment would have advanced to £16.30 due to the juicy 80p dividend.
Scenario #2
Despite the bright future of Glaxo’s diversified business model, some investors are convinced that returns for shareholders could be even better, if the company followed an altogether different strategy. Last year, a number of major shareholders — including celebrated fund manager Neil Woodford — called on Mr Witty to break up the group.
They argued that the sum of the parts was worth significantly more than the whole. Woodford and his team wrote: “All four of Glaxo’s major component businesses could be FTSE 100 companies in their own right, and we strongly believe that any future break-up would unlock considerable shareholder value”.
Mr Witty resisted the calls and new boss Ms Walmsley indicated this week that she was “committed” to the group’s existing structure. However, it’s early days in her tenure and I wouldn’t be surprised if further down the line there is corporate activity — whether demergers or sales — that realise value for shareholders well in excess of £16 a share.
In summary, whatever Glaxo’s future direction, I believe the shares represent excellent value at their current level.