3 Reasons I Believe GlaxoSmithKline plc Is One Step Ahead Of AstraZeneca plc

Roland Head explains why he believe GlaxoSmithKline plc (LON:GSK) may currently be a better buy than AstraZeneca plc (LON:AZN).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Back in 2012, AstraZeneca (LSE: AZN) (NYSE: AZN.US) was priced for disaster. Investors expected the firm’s profits to fall off the patent cliff, and the firm’s shares were trading on a trailing P/E of around 6 times earnings, with a yield of more than 6%.

Smart investors like Neil Woodford were loading up with AstraZeneca shares, which have since gained nearly 60%, despite the firm’s pre-tax profits falling by more than 70%.

Today, it’s a different picture: much of AstraZeneca’s likely future recovery has now been priced into the stock, and the Anglo-Swedish firm’s shares trade on a more demanding rating of 16.1 times 2015 forecast earnings.

In my view, GlaxoSmithKline is now a more attractive buy, despite the firms’ superficially similar valuations.

1. Glaxo may be cheaper

Glaxo shares currently trade on a 2015 forecast P/E of around 16, as do those of AstraZeneca.

However, using other metrics, Glaxo looks cheaper: AstraZeneca’ operating margin of 8% is half the 15% operating margin achieved by Glaxo last year.

It’s also worth noting that Glaxo’s current share price includes approximately 163p of cash returns planned for 2015 — equivalent to a chunky 10.5% yield. This is made up of the firm’s ordinary dividend (5.2% prospective yield) plus a planned 82p per share cash return, following the completion of Glaxo’s big deal with Novartis later this year.

2. Growth catalyst

Indeed, I believe that last year’s deal with Novartis will go a long way towards addressing the concerns investors have raised about Glaxo’s recent performance.

The concept behind the Novartis deal is to allow both firms to strengthen their positions in key markets.

There are three strands to the deal: Novartis will buy some of Glaxo’s new cancer medicines, Glaxo will buy Novartis’ portfolio of vaccines, and both companies will combine to form a new consumer healthcare business that will control many of the world’s best-known brands.

3. One step ahead

I believe the Novartis deal will give Glaxo a head-start over AstraZeneca in terms of new growth.

I’ve little doubt that AstraZeneca will eventually manage to develop its own solution to the growth problem, but my feeling is that Glaxo will get there first — and that after a difficult year in 2014, this potential is not currently reflected in GlaxoSmithKline’s share price.

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.

Roland Head owns shares in GlaxoSmithKline. The Motley Fool UK 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.

More on Investing Articles

Investing Articles

With 21% annual returns for 2 decades, this is a top pick for my Stocks & Shares ISA

Oliver Rodzianko has been looking for companies with exceptional returns for his Stocks and Shares ISA. Here's one he's considering.

Read more »

Investing Articles

Should I still be cautious about Rolls-Royce shares?

Rolls-Royce shares are flying. But is now the time for this Fool to open a position? Here, he explains why…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Is the Diageo share price coiled to rebound?

Christopher Ruane explains why he remains bullish about the long-term outlook for the Diageo share price and would happily invest…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

How I could make a 10% yield for high passive income a reality

Jon Smith explains how he can target high passive income from top-yielding stocks, including one specific example he'd consider.

Read more »

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »