Ten iconic UK shares: GlaxoSmithKline

The next in our series of articles using fundamental analysis to examine the prospects of 10 iconic FTSE companies.

GSK building
Source: Bloomberg

Reasons to watch

  1. Low PE relative to the sector
  2. Excellent development pipeline
  3. Strong dividend yield

History

GlaxoSmithKline, usually shortened to GSK, is the sixth-largest pharmaceutical firm in the world. It was formed in 2000 from a merger of Glaxo Wellcome and SmithKline Beecham, and manufactures drugs for a wide variety of conditions, including asthma, cancer, diabetes and mental health conditions. With offices in over 115 countries GSK has a broad global reach, although it retains its UK roots with its global headquarters in Brentford.

Fundamental analysis*

Earnings-per-share figures from GSK showed that the firm had beaten expectations for the third quarter at 27.9p versus expected 24.1p. However turnover fell by 3% to £5.6 billion. On a positive note, the firm declared that it still expects to meet full-year targets, while the dividend was boosted by 3% to 80p.

GSK has had a grim year. Not only has it underperformed the FTSE 100 by a significant margin – down 17% versus a 5.7% fall for the index – it has been left trailing by rival AstraZeneca, whose shares have rallied 18% since January, helped on the way by a bid attempt by Pfizer.

Add to that the Chinese saga that has seen the company fined £297 million by Beijing and you have a company that will be glad to see the back of 2014. Yet in adversity lies opportunity, and on a valuation basis the company is looking increasingly attractive.

At present GSK trades on a PE of just 13.7, compared to around 15 for the FTSE 100 and a remarkable 42 for rival AstraZeneca. Essentially, AstraZeneca is trading on a premium because investors believe that it is still a takeover target, but with the US having clamped down on the tax inversion principles that animated the Pfizer move (and the ill-starred tie-up between AbbVie and Shire) it looks like Astra is heading for a fall if no new suitor appears.

Meanwhile, all the bad news surrounding GSK means that expectations are low. Perhaps too low, in fact. The firm has more than 40 drugs under development, a crucial path to combating the steady decline in earnings from big name brands that have gradually declined in recent years. In addition, the company has made a firm decision to focus on real shareholder value by ignoring big name deals that grab headlines, in favour of quiet deals with other pharma firms like Novartis, that give its business a toehold in new markets without the expense or uncertainty that comes with M&A activity.

Finally, its dividend record should not be ignored. At 5.9% versus just 3.6% for the FTSE 100, income hunters will be naturally drawn to the firm, with further increases in yield expected.

For GSK, £13 was a big level back in November 2012, when the steady decline from £15 found a base. Once again a dip towards here in mid-October saw the buyers come back in but resistance is likely around the £14.20 mark where the 50-day moving average currently resides. Although no longer oversold, the short-term momentum remains to the downside with only a break towards £14 changing the scenario. 

*What is fundamental analysis?

Fundamental analysis seeks to examine a security by measuring its value through the use of financial and qualitative factors. Essentially, fundamental investors believe that each share is a piece of a company, and that the company can be analysed to determine whether the current share price indicates whether the company itself is undervalued (trading at a discount) or overvalued (trading at a premium).

The overall objective is to determine the underlying value of a company, and use comparisons with similar companies to determine if the business is likely to be successful or otherwise. Crucially, a company cannot be overvalued or undervalued in isolation. Instead, fundamental analysis compares a company to its peers in the sector, to the broader market, and to past valuations, to determine whether the current valuations are appropriate. 

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