Although GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has struggled to grow its net profit in recent years, that situation is set to change. Certainly, the pharmaceutical company is continuing to feel the pain of generic competition but, with considerable cost savings to come through over the next couple of years, its margins should pick up moving forward.
In fact, GlaxoSmithKline is set to overturn four years of a falling bottom line to post earnings growth of 11% in financial year 2016. That would be an impressive rate of growth, being around 50% higher than the growth rate of the wider index. And, with GlaxoSmithKline having a price to earnings (P/E) ratio of 16.9, it still offers good value for money for a highly diversified, financially sound pharmaceutical company. In fact, GlaxoSmithKline has a price to earnings growth (PEG) ratio of just 1.4, which indicates that its shares could move much higher over the medium to long term.
Of course, GlaxoSmithKline is one of many impressive pharmaceutical companies listed in the UK. For example, Vectura (LSE: VEC), the biotech respiratory specialist, is also expected to post much-improved financials over the next couple of years, with it set to turn from loss into profit in the current year. In fact, after racking up £48m in pretax losses in the last five years, Vectura is forecast to generate a pretax profit of £2.5m in the current year. And, looking ahead, its pretax profit is set to rise to £20m next year, which is gradually being priced in by the market.
As such, Vectura’s share price has risen by 38% already this year and, despite trading on a forward P/E ratio of 27.6, it still holds considerable appeal owing to a PEG ratio of just 0.2. Therefore, its share price growth could challenge that of GlaxoSmithKline moving forward.
Meanwhile, Circassia (LSE: CIR) is another pharmaceutical company with considerable potential. Its recent share placing was successful and allowed it to make two key acquisitions, with asthma specialist, Aerocrine, and chronic obstructive pulmonary disease stocks, Prosonix, being acquired for around £240m in cash. And, while the market has been rather subdued regarding the company’s progress (Circassia’s shares are up just 7.5% in the last year), Neil Woodford’s 13.5% stake is likely to help investor sentiment to improve moving forward.
Despite this, GlaxoSmithKline appears to be a better buy than both Circassia and Vectura. That’s at least partly because of its stronger financial standing, black bottom line (Circassia is set to remain a loss-making company over the next two years) and the fact that there is a clear catalyst to push GlaxoSmithKline’s share price higher, in terms of its appealing PEG ratio. In addition, GlaxoSmithKline has greater diversity than its two smaller sector peers and, while investor sentiment has been rather weak in recent years, a refreshed strategy and improving financial performance could enable its share to rise rapidly over the medium to long term.
So, while Circassia and, in particular, Vectura, are worth buying at the present time, GlaxoSmithKline appears to be the preferred option.
