Is GlaxoSmithKline plc still a strong buy after Q3 results?

Bilaal Mohamed shares his views on today’s third-quarter results from GlaxoSmithKline plc (LON:GSK).

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GlaxoSmithKline (LSE: GSK) has long been a favourite with investors both great and small. Everyone from multi-billion pound fund managers to the granny next door seems to have the global pharmaceuticals giant in their portfolio, and it’s not difficult to see why.

Get-rich-quick schemes

In an age of short-termism and get rich quick schemes, sensible investors know that the first step in generating sustainable long-term wealth lies in capital preservation. It’s for this reason that companies like Glaxo often form part of the core of many well-balanced portfolios, helping to steady the ship in times of political and economic uncertainty.

Along with other defensive sectors such as consumer goods and utilities, multinational pharmaceuticals are less likely to be affected by unforeseen events such as Brexit, or a surprise election win by Donald Trump. Both equity markets and currency markets can collapse and bounce back at a moment’s notice, but these sectors are generally less sensitive to or volatile on the back of such unpredictable political events.

Income investors in particular have had a long-term love affair with Glaxo. Thanks to its capacity to generate enormous profits from worldwide sales each year, the FTSE 100 stalwart can afford to reward its shareholders with generous quarterly payouts that have helped to support the company’s share price through a period when patent expiries have led to increased levels of generic competition for some of its treatments. But what about the future? Is there any hope of growth in such a competitive market?

New York, New York

Commentators like myself had to wait until noon today to get a glimpse of Glaxo’s third-quarter results, rather than the usual 7am regulatory news releases we’re accustomed to here in the UK. The reason? Glaxo is also traded on the New York Stock Exchange (NYSE), and noon equates to 7am Eastern Time. Further proof if it were needed that Glaxo is a true pharmaceutical goliath revered on both sides of the Atlantic.

Today’s results showed continued progress during the third quarter of 2017, with growth in sales and improved operating margins. This was driven by targeted cost savings and restructuring and integration benefits, which in particular helped the Vaccines and Consumer Healthcare businesses, and also supported investment in its new products and Research & Development pipeline. There were also major approvals for its Trelegy Ellipta treatment for Chronic Obstructive Pulmonary Disease (COPD) and shingles vaccine Shingrix.

New product sales up 44%

Pharmaceutical sales were up 3% during the quarter, reflecting continued strong growth of new Respiratory and HIV products, partly offset by a decline in the older products and the impact of recent divestments. Vaccine sales were up 5%, with a strong performance from Meningitis vaccines and continued delivery from influenza products. Consumer Healthcare sales were up 5%, reflecting strong performances from power brands in the Pain and Oral health categories.

But for me, what was most encouraging of all was that sales of new pharmaceutical and vaccine products were up by an impressive 44% to £1.7bn, with total group turnover rising 4% year-on-year to a mammoth £7.8bn.

So is Glaxo still a strong buy after third-quarter results? With its defensive qualities, attractive valuation at less than 14 times forward earnings, and juicy 5.3% yield, the answer has to be a resounding YES.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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