GlaxoSmithKline (LSE: GSK) is one of the most undervalued and underappreciated FTSE 100 companies, in my opinion. Glaxo is also difficult to understand.
On the face of it, many investors see the company as one of the UK’s largest pharmaceutical companies, which is struggling to boost sales. However, there’s more to Glaxo than meets the eye.
Indeed, while the company is best known for its big pharma roots, recent management initiatives to increase the group’s presence in the consumer healthcare market have turned Glaxo into a quasi-consumer goods company, with an added income stream from pharmaceutical products.
Consumer healthcare
Glaxo’s consumer health division is one of the world’s largest consumer health product suppliers, producing a range of over-the-counter medicines and skin treatments. Income from this unit is relatively stable and predictable. The same can be said for Glaxo’s vaccines unit.
On the other hand, Glaxo’s respiratory business is more unpredictable. Many of Glaxo’s troubles over the past few years can be traced to the group’s respiratory business.
Last year’s $20bn deal with Novartis will see Glaxo become the world’s leading consumer healthcare company through a joint venture. The deal saw Glaxo dispose of its oncology portfolio for $16bn while acquiring Novartis’ global Vaccines business for $5.3bn.
Glaxo and Novartis are creating a new consumer healthcare joint venture, with 2013 pro forma revenues of £6.5bn. Glaxo will have majority control of this world-leading consumer healthcare business with an equity interest of 63.5% and the option to buy out the remainder after three years.
There’s also plenty of value trapped in the rest of the Glaxo group.
Glaxo’s ViiV Healthcare HIV joint venture with Pfizer could be worth around £7bn and Glaxo holds an equity interest in South Africa’s generic pharmaceutical producer Aspen Pharmacare. On top of these interests, Glaxo has 40 new drugs under development in its treatment pipeline.
Fire up growth
All of the above factors will fire up Glaxo’s growth over the medium term. Group revenue is expected to grow at a compound annual growth rate of “low-to-mid single digits” over the five years from 2016 to 2020.
Over the same period, core earnings per share are expected to expand at a rate in the “mid-to-high single digits”.
But despite these growth projections, Glaxo’s defensive consumer healthcare business, its treatment pipeline and lucrative joint ventures, Glaxo is the cheapest big pharma group by far.
Cheapest of the pack
Glaxo’s peers, including the likes of Novartis, Pfizer, Roche and Sanofi all trade at an average forward P/E of 21.1. Glaxo trades at an average forward P/E of 18.1. What’s more, based on City earnings estimates for 2016 and 2017, Glaxo is currently trading at a valuation discount of 30% to its wider peer group.
Other valuation metrics also show the same kind of discount. Using the enterprise value to earnings before interest and tax or EV/EBIT metric, Glaxo is trading at a discount of 50% to its wider peer group on both a forward and current basis. These figures indicate that Glaxo should be trading 30% to 50% above current levels, in the region of 1,790p to 2,069p per share.
To complement this upside, Glaxo currently supports a dividend yield of 5.8% so investors will be paid to wait for the company’s return to growth.
