Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) to ascertain if its share price can return to 2,000p.
Initial catalyst
Of course, to establish whether or not the Glaxo’s share price will push back up to 2,000p, we need to establish what caused it to move there in the first place. In the case of Glaxo, it would appear that this rally was spurred by the merger of Glaxo with SmithKline Beecham back in 2001, forming the worlds largest pharmaceutical company.
What’s more, at this time the market was seemingly won over by the newly combined, GlaxoSmithKline’s future growth prospects. Indeed, investors were right to believe that the company was set for growth, as over the space of the next year, Glaxo’s pre-tax profit exploded 15% and earnings per share rose 10%.
Still, this growth was not enough to offset wider market consensus and unfortunately, just before Glaxo reached its high, the tech bubble had started to deflate. Over the next year-and-a-half, Glaxo’s share price declined a shocking 45%, roughly in line with similar declines reported for the FTSE 100.
But can Glaxo return to its former glory?
Sadly, Glaxo has been struggling during the past few years as it has lost the exclusive manufacturing rights to a number of its treatments and earnings have started to slide.
That said, it would appear that this is only reason that is standing in the way of the company’s return to greatness. Indeed, the company is already primed for a return to 2,000p per share, if it can increase margins and drive profits back to the levels seen during 2002.
Specifically, during 2002, Glaxo generated profits of £6.5 billion on revenues of £20.5 billion. However, during 2012, Glaxo reported revenues of £26.5 billion but profits of only £4.9 billion.
Of course, this depends on the development of the company’s treatment pipeline. Still, I have confidence in Glaxo’s ability to ride out this short-term slide in sales.
Actually, my figures suggest that if Glaxo does manage to drive profitability back to the level seen during 2002, the company is likely to be worth significantly more than 2,000p per share. In particular, during the past ten years, Glaxo has reduced its number of shares in issue by around 20%. This implies that if Glaxo’s profits hit £6.5 billion again, the company will earn 133p per share.
All in all, this implies that Glaxo will trade at a P/E of only 12.5 based on its current price. Moreover, it is likely that the market will place a premium on this kind of earnings growth.
Foolish summary
So, it would appear that Glaxo has all the foundations in place to make another run at 2,000p. The company just needs to cut costs further and inject some life into its treatment portfolio.
Overall, I feel that GlaxoSmithKline’s share price can return to 2,000p.
