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GlaxoSmithKline Plc

We here at ValueTheMarkets like to provide our readers with a diverse range of investment ideas, spread your risk and invest wisely. With the Ebola virus making all the headlines of late, GlaxoSmithKline flagged up with the news it was working on a vaccine to be rolled out as soon as possible. Having looked at the company after it released Q3 earnings on Wednesday, the company not only looks attractive for a punt on the Ebola vaccine potential, but it also looks attractive on fundamental and technical levels.

GlaxoSmithKline (LON:GSK) is one of the world’s largest pharmaceutical companies with operations in over 150 countries. Their activities span 3 different segments which include vaccines, pharmaceuticals and consumer healthcare. Technically the share price, currently 1,415p, has just come of its 52 week low of 1,324p and managed to get itself back into a long-term upward trend channel, the top of which would suggest a target over 1,600p.

Fundamentally, Q3 earnings showed turnover fell 3% at constant exchange rates and 10% in total whilst core operating profit fell 1% and 6% total, however EPS actually rose 5% in the third quarter. Overall, in the 9 months to date EPS was 2% lower. For the full year to 31 December 2014, EPS is expected to be 93.33p putting Glaxo on a 2014 PE of 15.1 and the following year, EPS of 97.15p gives a 2015 PE of 14.5. The historical average for Glaxo is a PE of 17.2 so you could say the stock is undervalued.

As you can see, the numbers aren’t mind-blowing but are very solid and the share price gained over 3.5% after the news on Wednesday, the highest riser of the day out of the FTSE100, showing the investment world liked what they saw. On top of this, Glaxo boasts the highest yield out of the top pharmaceutical companies, currently close to a 6% dividend. This is a company with an A+ credit rating and has generated over £3 billion in free cash flow during the last financial year. Also the fact that the share price has had a tough time over the last year or so means you can now buy the stock on this attractive % yield.

So why has the price declined? The main reason for the sell-off relates to the China bribery scandal which cost the company around £300 million in fines. A drop in the ocean when you consider the company is expected to make £23.5 billion in revenues this year. But that being said, it damaged the company’s reputation and turned sentiment a little sour. Another reason for the decline is the increasing pricing pressure in its main product’s arena, namely Advair. This has and will likely continue to impact the company’s earnings as it is its highest margin product however they do have a promising pipeline of new products which will diversify this risk.

With this in mind, Glaxo said they are launching a restructuring programme to re-focus its global pharmaceutical business and save £1 billion in costs and they are also considering an IPO for part of its HIV business to improve future strategic flexibility and visibility within the group. It seems as though management are not going to sit on their laurels and it’s good to see they are putting the recent China problems behind them and are looking at a strategy to drive the business forward again.

We would recommend buying GlaxoSmithKline around the current price of 1,415p with a short term target of 1,650p. Currently trading on a PE below its historical average, a dividend yield of almost 6% and the additional gamble of a positive Ebola vaccine outcome make this stock look attractive at its current level.

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