Even after recent gains, GlaxoSmithKline plc may still be undervalued!

Could GlaxoSmithKline plc (LON: GSK) be set to charge even higher?

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Now the dust is starting to settle from the Brexit vote and markets are starting to take a more rational view, some investors have begun to come out of hiding and are looking for bargains.

One company that may still be a bargain, despite its impressive gains since 24 June, is GlaxoSmithKline (LSE: GSK).

Market darling 

Since the day after the vote, shares in Glaxo have increased 16.2%, outperforming the wider FTSE 100 by around 5.5% and extending year-to-date gains to 21%, excluding dividends. But Glaxo’s shares could be set to push even higher over the next few months as the company updates the market on its transformation programme and reveals how much it will benefit from Brexit market turbulence.

Indeed, Glaxo’s earnings are set to benefit significantly this year from the devaluation of sterling against other currencies. At time of writing, sterling is down by around 11% to 12% against a basket of currencies. Analysts at Deutsche Bank estimate the impact of a 10% depreciation of sterling against all other currencies will have a positive impact of 12% to 14% on Glaxo’s full-year earnings per share. 

Based on the above figures, sterling’s devaluation is set to be a huge tailwind for Glaxo’s earnings growth this year.

A bumper year

Along with the currency factor, Glaxo’s shares are also set to receive a boost from underlying earnings growth this year. 

For the past couple of months, it has been clear that 2016 will be a bumper year for Glaxo. Before the Brexit shock at the end of June, City analysts were expecting the company to report earnings per share growth of 16% for 2016. 

An impressive set of first-quarter results confirmed the firm was on track to meet this forecast. Sales increased 11% year-on-year for the first three months of the year to £6.23bn and earnings per share, excluding exceptional items and adjusted for currency, rose 8% to 19.8p. That’s ahead of City forecasts that were calling for earnings per share of 18.2p.

At time of writing, City consensus estimates expect Glaxo to report earnings per share growth of 19% for 2016. However as of yet, it’s unlikely that this adequately reflects sterling’s depreciation, and we’ll only find out how much of a tailwind sterling has become when Glaxo reports third-quarter results later this year.

Still, the revised earnings forecasts should alleviate any concerns there are about the sustainability of Glaxo’s dividend payout. Management has stated that the payout will remain at 80p per share for the next few years, and City estimates suggest Glaxo is set to report full-year earnings per share of 90p for 2016. 

Even after the recent gains in Glaxo’s stock price, a dividend payout of 80p per share translates into a yield of 4.9%.

Undervalued 

Shares in Glaxo currently trade at a forward P/E of 18.5 for 2016, which looks cheap when you consider the fact that the company’s earnings per share are set to expand by 19% this year. Analysts have earnings per share growth of 5% pencilled-in for the year ending 31 December 2017, putting the company’s shares on a 2017 P/E of 17.6.

With a yield of just under 5% and plenty of growth ahead, it looks as if Glaxo’s shares remain undervalued, even after recent gains.

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.

Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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