Why I Think Shire plc Will Outperform AstraZeneca plc And GlaxoSmithKline plc By At Least 10% In 2015

Alessandro Pasetti explains why Shire plc (LON:SHP) is his favourite pick, followed by GlaxoSmithKline plc (LON:GSK), and why he’d avoid AstraZeneca plc (LON:AZN) for some time.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You probably know everything about GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) by now: a bribery scandal in China, falling earnings and a patent cliff have all weighed on its equity valuation in recent times. You’ll surely also have heard of AstraZeneca (LSE: AZN) (NYSE: AZN.US): its revenue and earnings have dropped at a faster clip, but Astra’s valuation has been favoured by a takeover approach from Pfizer last year. 

If I were to invest in the pharma space, though, I’d probably choose Shire (LSE: SHP), which will comfortably outperform Glaxo and Astra this year and next, in my view. Here’s why.

GlaxoSmithKline: It Could Get Better 

I have been very bullish on Glaxo until recently but its fundamentals, a conservative corporate strategy, its pipeline of drugs as well as the stock’s relative valuation suggest that Glaxo won’t deliver huge capital gains for some time, although its dividend yield is particularly appealing. Upside is in the region of 10% in 2015, in my opinion. 

“GSK faces a load of problems of its own. It’s a huge player in respiratory, which is facing precisely the same issues as diabetes for Sanofi – massive price pressure, basically turning it into a commodity segment,” one senior pharma analyst recently told me. “And GSK sold its oncology business to Novartis, which is seen as lunacy, (given that) oncology is probably the biggest growth area now for pharma,” he added. 

The average price target from brokers has declined by 15% in the last 12 months to 1,505p, which is 9% higher than Glaxo’s current valuation of 1,377p. Analysts at JP Morgan took the brave decision to cut Glaxo’s price target to 1,300p (underweight, from neutral) earlier this week, but I think the shares could easily beat consensus estimates by the end of the year. 

A soft break-up of the group would be great news for value investors. 

AstraZeneca: Simply Overpriced

Astra is my least favourite pick in the pharma sector, although Astra’s management team has done a good job in managing expectations in recent times. 

Based on trading multiples, fundamentals, R&D and the pipeline of drugs, my price target for Astra is much lower than Astra’s current equity valuation — say between £30 and £35 a share, for an implied downside of up to 33% from its current level. I appreciate Astra offers a decent yield, but roughly one third of its current stock market value is still based upon hopes that a suitor will show up with a blown-out offer, which is highly unlikely in my view. 

JP Morgan raised its price target to 4,500p this week, which is about 6% below the average price target from brokers. I think most analysts are wrong, end of story. 

Shire: Lots To Like In It At This Price

At 4,560p, Shire shares seem properly priced right now, one may argue. Following the integration of ViroPharma, additional bolt-on deals may boost shareholder value, however.

Shire stock has depreciated fast in recent months, but may surge if Shire exploits its strong balance sheet. According to press reports, the British company is one of the few bidders lined up for NPS Pharmaceuticals, which would be a good fit in Shire’s portfolio. Since merger talks with AbbVie collapsed, the shares of Shire have lost 15% of value, but a strong pipeline of drugs may also help it deliver a strong growth rate for revenue and earnings over the medium term.

I’d add Shire to a diversified portfolio based on fundamentals and trading metrics, which indicate upside could be at least 20% in the next 12 months or so.

If Shire managers get their capital allocation strategy right (I have little doubt they will), I may end up agreeing — for once! — with analysts at Citi and JP Morgan, who raised Shire’s price target to over 5,000p earlier this week.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bearded man writing on notepad in front of computer
Investing Articles

Could a 2025 penny share takeover boom herald big profits for investors?

When penny share owners get caught up in a takeover battle, what might happen? Christopher Ruane looks at some potential…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »