On 5 February, FTSE 100 pharmaceutical giant GlaxoSmithKline (LSE:GSK) released 2019 full-year and fourth-quarter results that raised eyebrows.
GSK delivered 2019 sales of £33.8 billion. Yet full-year profits were below estimates and adjusted earnings per share (EPS) grew only 1% to 123.9p, shy of the market expectation of 125p.
The company reports revenue by three segments: pharmaceuticals, vaccines, and consumer products.
Performance of the vaccine division, where revenue increased by 19%, pleased investors. Sales of Shingrix, GSK’s shingles vaccine, was especially robust, followed by the meningitis vaccines.
Similarly, respiratory revenues were up 15%, mostly helped by chronic obstructive pulmonary (COPD) drug Trelegy Ellipta and asthma drug Nucala.
However, established pharmaceutical sales was down 8%, impacted by Advair, which has been facing new generic competition since coming off patent.
Furthermore, management’s guidance for 2020 was less than encouraging as adjusted earnings for this year could fall as much as 4%.
But the big news of the day was regarding the upcoming split of the company into two.
Sum of parts
In 2018, GSK and US drugmaker Pfizer had announced a merger to create a leader in over-the-counter (OTC) products. They had said they’d spin off their consumer healthcare brands in a new venture of which GSK would own 68%.
Now the the two companies are moving ahead with plans. The “new GSK” will now be a research-based pharma company. It will focus on immune system drugs, use of genetics, and new technologies.
And management would like to see the second company become a new leader in consumer healthcare.
The move would take two years as GSK “increases investment in R&D and new product launches.” The cost of this division is likely to be about £600–£700 million. And the group would look at selling non-core assets, starting with a review of its prescription dermatology business.
So is it time to buy GSK?
The answer depends on many factors, including your risk/return profile and time horizon.
The trailing P/E ratio of GSK stands at 17.9. I’d be more comfortable with a number around 13 to 14. For comparison, the metric for other pharma giants AstraZeneca and Pfizer stands at 62 and 13 respectively.
Furthermore, the price-to-sales (P/S) ratio of GSK shares is a bit higher than I’d like to pay for. It currently stands at 2.5 times. Companies generate revenue from the sale of goods and services. Analysts prefer a low P/S multiple, ideally below 1 times. However, a P/S number between 1 and 2 times is more common. The ratio for AstraZeneca and Pfizer stands at 5.3 times and 4.1 times respectively.
Closely followed stocks like GlaxoSmithKline tend to be volatile around earnings dates. In general, unless the company can crush estimates quarter after quarter, and usually by a respectable margin, then investors tend to punish the stock following the earnings announcement.
And that is what has happened with GSK shares in the past few days. On 5 February, the stock saw a recent high of 1,844p. Right now, the price is hovering around 1,695p. That is a drop of about 8%.
Those who do not own the stock may consider buying into the company at any further decline. I’d expect the shares to recover in the coming months.
On a final note, income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. GSK’s dividend yield is about 4.7% — another important reason why I believe GSK shares belong in a capital-growth portfolio.
