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Which is the better buy? GlaxoSmithKline plc vs Shire plc

Photo: Ian Wilson. Cropped & adjusted. Licence: https://creativecommons.org/licenses/by/2.0/

Shire (LSE: SHP) and GlaxoSmithKline (LSE: GSK) are two of the UK’s premier pharmaceutical companies but over the past five years, their fortunes couldn’t have been more different.

While Shire’s explosive revenue and income growth has propelled the company’s shares higher, Glaxo has struggled to bring new products to the market and reignite sales growth. Specifically, this year City analysts are expecting a Shire to report revenue of just over $10bn, up a staggering 138% since 2011. Over the same period, the company’s earnings per share are on track to have grown by 158%. For 2017, City analysts have pencilled-in revenue growth of 36% and earnings per share growth of 19.2%.

Glaxo’s earnings per share are expected to grow by 27% this year bringing an end to four years of earnings declines as the company has struggled with falling sales. This year, City analysts are expecting the company to report revenue for the 12-month period of £27bn, which is £400m less than the figure reported for full-year 2011. Over the same period, if the company hits City targets this year, earnings per share will have declined by 19%.

Buy the underdog? 

After comparing these growth statistics between the two companies, it should come as no surprise that shares in Shire have outperformed those of Glaxo by 135% over the past five years.

Even though I’m usually attracted to the underdog, this time around it looks as if Shire may be the better long-term investment. Granted, Glaxo is returning to growth and the company’s dividend yield, which currently stands at 4.8% is attractive in today’s low-interest rate environment. Nonetheless, when it comes down to valuation, Glaxo looks less attractive than its smaller peer.

Shares in Glaxo currently trade at a forward P/E of 17.3, a valuation that looks rich at first glance but when you consider the company’s defensive nature and attractive dividend yield, it’s understandable. 

However, shares in Shire currently trade at a more attractive forward P/E of 15.6. City analysts are predicting that the company’s earnings per share will grow 79% this year, giving a PEG ratio of 0.2. A PEG ratio of less than one indicates that the shares in question offer growth at a reasonable price. Next year City analysts have pencilled-in earnings per share growth of 19% and on this basis shares in the company are trading at a 2017 P/E of 13.2.

As covered above, Glaxo’s earnings per share are expected to expand by 27% this year, but growth is projected to slow to 7% next year. The shares trade at a PEG ratio of 0.6 for 2016, which clearly shows that they’re less attractive than shares in Shire from a growth perspective.

The bottom line

So overall, while the allure of Glaxo’s market-beating dividend yield may draw investors to the company, Shire looks to be the better pick for growth.

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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.