GlaxoSmithKline Is a Massive Bargain
- By Jonathan Poland
When Jim Simons (Trades, Portfolio) owns north of 10 million shares of a stock like GlaxoSmithKline , you should take notice. So I did. GlaxoSmithKline (GSK) has a very strong durable competitive advantage that will keep it profitable and growing for years to come.
Warning! GuruFocus has detected 3 Warning Signs with GSK. Click here to check it out.
The intrinsic value of GSK
The company is the world leader in first line pain relief with Voltaren, Panadol, and Exedrin. It"s oral health brands include Aquafresh, Sensodyne, and Polident. Glaxo has Flonase, Theraflu, and Nicorette Gum, Tums, and skin care products Abreva, Physiogel, and Lamisil - collectively these household names dominate your local pharmacy, but that"s only one portion of the business.
Glaxo"s product lineup creates enormous cash flow ($6 billion) needed to fund the average $800 million in development costs per new drug. The company"s patent-protected drugs carry strong pricing power, and while it does have to brace for new generic versions, it continues to bring new and needed therapies to market. COPD drug Advair generates more than $1 billion in sales per quarter, roughly 10% of the firm"s total revenue. It"s highly likely that a generic version will launch by 2020, but that means the dividend and growth will not be hindered by market competition just yet.
Glaxo is a big player in HIV research with drugs like Tivicay and Triumeq, each generating over $1 billion in annual sales. It also has two new drugs Breo and Anoro along with 16 late-stage drugs in the pipeline. These drugs take a lot of time and capital to get to market, but the winners have far outweighed the losers to date.
Glaxo has been hurt by downward pressure on the British Pound (thanks to Brexit), which now sits at $1.35 per pound. The company is looking to earn roughly $3.00 for the year and $3.15 next year. Any uptick in pound to dollar ratio and investors could see $3.50 - $3.75 by the end of 2018. Investors are receiving dividends of $0.50 per quarter, good for 5.5% yield. That number will only grow over time, which makes now the time to buy.
Given another decade Glaxo could be earning $5 a share, paying out 8-10%. That"s if the pound stays at its current level, which is super low historically versus the dollar. My thesis is that investors will see both earnings growth and currency price appreciation, leading to a much higher valuation in USD terms.
Looking ahead just 5 years, if the GBP moves back to $1.5 per Glaxo"s EPS would reach $4.05 and given an average P/E of 30x would put the price over $120, plus dividends. If that doesn"t happen, you still made out with a pretty hefty dividend from a global leader in healthcare products.
Disclosure: I am not long/short GSK.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with GSK. Click here to check it out.
The intrinsic value of GSK
