The GlaxoSmithKline (LSE: GSK) share price has climbed 10% over the last three months against a flat FTSE 100. Meanwhile, smaller-cap Alliance Pharma (LSE: APH) has seen its shares decline 10% over the same period. In this article, I’ll discuss why I’d still buy GSK, despite the surge in its market valuation, and why I also rate out-of-favour Alliance a ‘buy’.
Business model
Alliance owns or licenses the rights to more than 90 consumer healthcare products and pharmaceuticals. With wide international reach through an extensive network of distributors, it generates sales in more than 100 countries.
Many of its products are sold in a limited number of local markets and require little or no promotional investment. Its promotional investment is focused on a small number of brands with significant international or multi-territory reach, including Kelo-cote (a scar treatment product) and Vamousse (a product for the prevention and treatment of head lice).
Valuation highly attractive
Alliance has a strong record of acquisitions and organic growth. A half-year trading update last month told us group revenue increased 28%, with organic growth of 10%. City analysts’ full-year forecasts are for revenue of £144m, an increase of £100m on the £44m it posted five years ago.
One of the biggest 50 companies on London’s junior AIM market, Alliance’s market capitalisation is £351m at a current share price of 67.6p. Therefore, the forward price-to-sales (P/S) ratio is 2.4. Meanwhile, a City consensus earnings per share (EPS) forecast of 5p (10% ahead of last year) gives a price-to-earnings (P/E) ratio of 13.5, while a forecast well-covered 1.6p dividend produces a prospective yield of 2.4%.
In a defensive sector, and with a low-risk business model and strong record of growth, I think Alliance’s valuation is highly attractive.
More highly rated stock
GlaxoSmithKline is not only a giant — its market capitalisation is £84.5bn at a share price of 1,693p — but also a more highly rated stock than Alliance on P/S and P/E. On forecast revenue of £32.4bn, its P/S is 2.6, and on forecast EPS of 115p (4% down on last year), its P/E is 14.7.
GSK’s dividend yield of 4.7%, on a forecast payout of 80p, is higher than Alliance’s but less well covered by EPS. Alliance’s yield would be 5.1%, if it paid out the same proportion of earnings as its FTSE 100 peer.
On the face of it, GSK may not seem to offer particularly good value. However, I believe there’s one big reason why it does.
Still good value
Earlier this month, GSK announced it had completed its planned transaction with Pfizer to combine their consumer healthcare businesses into a world-leading joint venture. GSK has a 68% controlling interest and Pfizer an interest of 32%. This is a step on the way to GSK demerging the joint venture from the company and listing the GSK Consumer Healthcare business on the UK stock market.
Chief executive Emma Walmsley said: “This is an important moment for the group, laying the foundation for two great companies, one in pharmaceuticals and vaccines, and one in consumer health.”
A number of analysts and institutional investors had long argued that breaking up the group would unlock value for shareholders. Neil Woodford once suggested a potential sum-of-the-parts valuation of £100bn. This compares with GSK’s current market value of £85bn, and is the principal reason why I still see good value in the stock today.
