GlaxoSmithKline (LSE: GSK) has been out of favour with the market for some time. Its recent results did nothing to improve sentiment. Indeed, the GSK share price slumped to a five-year low last week.
The stock looks very buyable to me right now. Here, I’ll discuss why I think it’s attractive, as well as the potential risks.
Decline of the GSK share price
Little more than a year ago, GSK’s shares hit a peak of 1,846p. From there to last week’s five-year low of 1,255p is a decline of 32%. That’s some swing in market sentiment!
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Results on 3 February produced the final push into multi-year-low territory. The GSK share price suffered a one-day fall of over 6%.
Performance and outlook
GSK’s headline numbers didn’t appear to me to merit such a drop in the share price. The company reported a 3% rise in sales and a 4% fall in adjusted earnings per share (EPS) at constant exchange rates (CER), “in line with guidance.”
I think the market was disappointed by the company’s outlook for 2021. Management said it expects modest sales growth and “a decline of mid to high-single digit percent adjusted EPS at CER.” The 2022 outlook though, remained unchanged. The company continues to expect a “meaningful improvement in revenues and margins.”
GSK’s dividend news may also have negatively affected the share price. The board maintained the 2020 payout and expects to maintain it in 2021. However, to support growth and investment, the company said it will be implementing a new dividend policy in 2022 under which “we expect that aggregate distributions for GSK will be lower than at present.”
Looking longer term
I think the market is perhaps being short-sighted. Near-term sales are expected to be anaemic and earnings subdued due to investment in R&D and the promotion of new product launches. The business hasn’t been entirely immune to the impact of the Covid-19 pandemic either. Finally, the preparations for demerging the consumer healthcare business in 2022 are also weighing on near-term performance.
However, in the longer term, I see plenty to encourage me that GSK offers significant value at the current share price. The company reported “strong growth of new and specialty products” in 2020. Its biopharma pipeline has “over 20 assets now in late-stage clinical trials.” These include “10+ with potential peak annual revenues in excess of $1bn.”
Meanwhile, the demerger of the consumer healthcare business, with its £10bn annual sales, will create a standalone global leader in the sector.
Why I like the GSK share price
GSK’s shares are off last week’s low, being priced at 1,278p, as I’m writing. This is 11 times the group’s 2020 EPS.
The consumer healthcare business contributed 25% to operating profit. I see no reason why this business shouldn’t command an earnings rating similar to consumer health and hygiene company Reckitt Benckiser.
I can understand the market being hesitant to rate the pharma side of the business highly at the moment. After all, there’s a risk its pipeline may not be as productive or lucrative as management currently anticipates.
However, if I rate the consumer business at a Reckitt Benckiser-style 20 times earnings, and the pharma business at the modest 11 times earnings, I arrive at an aggregate 13.25 times earnings, and fair value for the GSK share price of 1,536p.
Despite the aforementioned pipeline risk, I see potential upside for GSK of over 20% excluding dividends.
