2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up by 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) still offer good value, after five years of market gains.
Back to basics
Glaxo’s share price has edged ahead of the FTSE this year, with a 16% gain, but the firm’s shares have underperformed the index over the last five years, climbing just 26% during that time — less than half the FTSE’s gain.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of Glaxo shares, we need to forget about historic price movements, and focus on what can we get for our money today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 14.7 |
| Trailing dividend yield | 4.9% |
| Operating margin | 25.0% |
| Net gearing | 252% |
| Price to book ratio | 11.3 |
Glaxo’s P/E is slightly below the FTSE 100 average of 16, and its yield of 4.9% is considerably higher than the FTSE average of 3.2%.
The pharma firm’s 25% operating margin is also attractive, and its dividend payout has risen by 45% since 2007, cementing its reputation as an income share. However, I can’t help being concerned by Glaxo’s net gearing of 252% — Glaxo’s £15bn net debt is the main reason it trades at such a high price to book ratio.
In summary, Glaxo appears reasonably priced at present, but its high debt levels could cause problems when interest rates rise.
Rising profitability?
Having weathered the patent cliff storm, which has seen Glaxo’s adjusted earnings per share drop from 142p in 2010 to just 98.7p in 2012, the firm’s profits now appear to be on the rise once more.
Glaxo’s cash flow has improved significantly this year, and analysts are forecasting a 14% increase in earnings per share for 2013, followed by a 7.6% increase in 2014 — that makes Glaxo appear quite good value:
| Metric | Value |
|---|---|
| 2014 forecast P/E | 12.9 |
| 2014 forecast yield | 5.2% |
| 2014 forecast earnings growth | 7.6% |
| P/E to earnings growth (PEG) ratio | 1.7 |
Nearly 80% of Glaxo’s sales are vaccines and prescription medicines, and its pipeline has a number of innovative new products that could dominate their target niches over the next 5-10 years.
