The GlaxoSmithKline (LSE: GSK) share price has achieved one of the best performances of any FTSE 100 stock this year.
Over the past 12 months, shares in the pharmaceutical giant have yielded a total return for investors of 16.1%, outperforming the Footsie by 13.5%.
Following this performance, the Glaxo share price looks hugely tempting, but are the shares undervalued at current levels? Today I’m going to try and figure this out.
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Dramatic turnaround
Glaxo’s CEO is almost entirely responsible for the company’s spectacular performance over the past year. Emma Walmsley was appointed group CEO after Sir Andrew Witty retired in March 2017. She inherited a firm that had a global reputation, but that lacked a strategic focus. Walmsley didn’t waste any time changing the direction of the business.
Since taking over, she’s outlined a new road map for the company’s consumer pharmaceuticals business, presided over the substantial acquisition of Tesaro and re-focused Glaxo’s research and development teams.
The new CEO has also outlined plans to break up the business at some point in the next few years. This is something the City has been pushing for some time.
Breakup on the cards
After Glaxo announced the £10bn joint venture with its US rival Pfizer to combine the two groups’ consumer healthcare businesses, management revealed that when the deal is complete, it will de-merge and float the enterprise.
The deal closed late last month. Glaxo has a 68% ownership stake with Pfizer owning the remainder. The combined entity will have sales of as much as £10bn and could yield cost savings of £500m by 2022.
The two partners want to spin off the new business within three years of completing the deal. So, on that time frame, it looks as if the de-merger will take place in 2022.
And when it does, it could unlock a lot of value for shareholders. Some analysts have suggested that on a sum-of-the-parts basis, the Glaxo share price is worth more than 2,000p. Unlocking value through a break-up makes it more likely that at this price target will be realised.
Unlocking value
The possibility of a break-up is the primary reason why I think the Glaxo share price could be a great addition to your portfolio.
While the stock might look quite expensive compared to the rest of the market at current levels, the break-up value suggests that anything below 2,000p is a good deal.
The stock is currently trading at a forward P/E of 15 compared to the UK pharmaceutical average of 17. It also supports a dividend yield of 4.6%.
Including this income, based on the assumption that the Glaxo share price will hit 2,000p by 2020, I calculate investors could pocket a return of 30% over the next three years or 10% per annum. Because the FTSE 100 has produced an average annual return of 7% for the past 10 years, this yield looks highly attractive to me.
