GlaxoSmithKline (LSE: GSK) has announced that its CEO, Andrew Witty, will be replaced by Emma Walmsley. She’s the current CEO of its Consumer Healthcare division and will take over the reins of the company in March 2017. Sector peer Hikma (LSE: HIK) has also announced exec changes, but it’s for GlaxoSmithKline’s outlook that today’s changes could make the most difference.
In GlaxoSmithKline’s case, the appointment means that there will now be six female CEOs in the FTSE 100. As with any new CEO appointment, it brings a degree of uncertainty. That’s not to say that the new CEO won’t live up to expectations, but rather that it signifies change and investors have historically not been too keen on change.
However, Glaxo’s new CEO is an internal promotion and so it means that she should be able to ‘hit the ground running’ in terms of understanding the business and what needs to be done to improve its financial performance. This is a key reason why the share price hasn’t reacted strongly to the news.
Of course, Glaxo has a very bright long-term future. Its diversification dramatically reduces its risk profile, since it’s less reliant on the development of blockbuster drugs thanks to its Consumer Healthcare division. This provides a degree of stability through the patent cycle and alongside the Vaccines division means that it has three world-class businesses under one roof.
The company’s decision to freeze dividends over the next few years is a sound one and should allow for greater investment in its pipeline. On this topic, Glaxo has a well-diversified and exciting pipeline of potential new treatments, especially within its ViiV Healthcare subsidiary.
Looking ahead, the company is forecast to increase its bottom line by 27% in the current year and by a further 7% next year. This puts it on a price-to-earnings growth (PEG) ratio of 0.6, which indicates that now is a good time to buy it.
Hikma non-execs
As mentioned, Hikma also announced changes to its management team today. It has appointed a new non-executive director as well as announcing the retirement plans of two non-executive directors. But those changes aren’t likely to affect its future prospects. Looking ahead, Hikma is expected to record a rise in its bottom line of 39% in the next financial year following a fall of 24% this year. This puts it on a very enticing PEG ratio of 0.5, which shows that Hikma’s upward rerating potential is high.
Clearly, Hikma’s valuation is more attractive than GlaxoSmithKline’s. However, the size, scale and diversity of the latter means that based on their risk/reward ratios, Glaxo is the better buy. It also offers a yield of 4.9% versus just 0.8% for Hikma and its dividends are covered 1.2 times by profit versus 4.6 times for Hikma. But the size of the difference in yields makes GlaxoSmithKline the superior income play.
Certainly, Hikma looks set to outperform the wider index and the wider healthcare sector, but GlaxoSmithKline remains the better investment for the long term due to its lower risk and higher yield.
