Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).
Valuation
Firstly, let’s start with the basics, the company’s valuation.
GlaxoSmithKline trades at a historic P/E ratio of 13.9, which is below the biotechnology sector average of 17.1. That said, Glaxo’s 10-year average historic P/E is around 13, so based on that the company looks to me to be overvalued.
Nonetheless, Glaxo’s close peers, Shire (LSE: SHP) and AstraZeneca (LSE: AZN) (NYSE: AZN.US) trade at historic P/Es of 30 and 8 respectively. So all in all, it’s difficult to establish a correct value for the company.
Balance sheet
| Net-debt-to-assets | Interest cover by operating profit | |
|---|---|---|
| GlaxoSmithKline | 34% | 10x |
| AstraZeneca | 5% | 18x |
| Shire | 5% | – |
Unfortunately, compared to its closest peers it would appear that Glaxo has the highest net debt as a percentage of its assets. In addition, Glaxo’s net debt has expanded a compounded 40% since the beginning of 2008, from around £10 billion to £14.1 billion. In comparison, peer AstraZeneca has reduced net debt by 70% over the same period.
Nonetheless, at the end of 2012 Glaxo had £4.1 billion in cash on its balance sheet, just enough to cover all of its short-term debt falling due within the year.
Company’s performance
| Earnings growth past five years | Net profit margin | |
|---|---|---|
| GlaxoSmithKline | 8% | 16% |
| AstraZeneca | 26% | 14% |
| Shire | 317% | 13% |
Rising debt is commonly indicative of a company that is investing for growth, however, this does not seem to be the case for Glaxo. Indeed, Glaxo’s earnings growth during the past five years seriously lags its three closest peers, as shown above.
Furthermore, the company’s net profit margin has recently fallen from a high of 20%, which was seen back during 2011.
Dividends
| Current Dividend Yield | Current dividend cover | Projected annual dividend growth for next two years. | |
|---|---|---|---|
| GlaxoSmithKline | 4.7% | 1.5 | 6% |
| AstraZeneca | 5.5% | 2.3 | 2% |
| Shire | 0.4% | 7.7 | 38% |
| Sector average | 4.5% | 1.3 |
Once again, Glaxo lags its closest peer AstraZeneca when it comes to dividends paid out to shareholders.
Granted, Glaxo’s dividend growth is expected to outpace that of AstraZeneca during the next two years. However, AstraZeneca’s stronger dividend yield and the fact that the payout is covered nearly two-and-a-half times by earnings gives me more confidence in AstraZeneca’s payout.
Foolish summary
All in all, Glaxo’s higher than average level of debt and slow earnings growth over the past five years are causes for concern.
So overall, I feel that GlaxoSmithKline is a much weaker share than its peers.
