Today, I am looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), and deciding whether the pharma stock offers the right prescription for glorious gains.
Pumping up the pipeline
GlaxoSmithKline reported last month that total sales rose just 2% on a constant currency basis in the second quarter, to £6.62bn. And operating profit fell 13% from the corresponding 2012 period to £1.44bn.
The company has suffered from major patent expirations across several key drugs in recent times, a phenomenon that drove earnings modestly lower last year. But GlaxoSmithKline has invested heavily in R&D to counter this problem and develop its product pipeline to facilitate future growth.
In the last quarter, the business received approval in the United States for its Breo Ellipta treatment for chronic obstructive pulmonary disease. It also got the go-ahead for its Tafinlar and Mekinist drugs for the treatment of metastatic melanoma. In total, GlaxoSmithKline is expecting Phase III data for 13 products this year.
Big trouble in not-so-little China
GlaxoSmithKline has been rocked in recent weeks by allegations of corruption against dozens of its employees, including senior executives, in China. The crisis has seen Herve Gisserot, the firm’s vice president for Europe, parachuted in to head up operations in the country amid allegations of rogue conduct.
The firm has been quick to distance itself from the scandal, commenting that it is ‘taking this matter very seriously and… co-operating fully with the Chinese authorities‘, and that it has ‘zero tolerance for any behaviour of this nature‘. Although it is early days in the investigation, and China represents a massive deal in terms of future earnings, GlaxoSmithKline is certainly making the right noises in terms of damage limitation.
Brace yourself for accelerating earnings
According to City forecasts, earnings are ready to resume their path higher from this year onwards following the difficulties of 2012. A 3% earnings per share advance is anticipated for 2013 before charging 10% higher next year.
The company currently changes hands on a P/E ratio of 14.7 for 2013, far in advance of major rivals such as AstraZeneca, which was recently dealing on a prospective readout of 7.9. However, the latter’s current rating well below the bargain benchmark of 10 is justified given its paltry pipeline and meagre near-term earnings prospects, particularly compared with those of its rival.
The right medication for meaty dividends
GlaxoSmithKline is liked among dividend seekers owing to its ability to lift the full-year dividend even in times of heavy earnings pressure in recent times. Indeed, the final shareholder payout last year was up almost 30% from that of 2008, and brokers expect dividends to keep moving higher over the medium term.
And the company currently offers a yield of 4.3% and 4.6% for this year and next, well above the prospective FTSE 100 average of 3.3%.
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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.
