It has been some time since pharmaceutical giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has been this cheap. At 13.8 times earnings, it is only marginally pricier than the average FTSE 100 stock at 13.25 times, but that still makes it a relative bargain. The share price is down more than 5% in a week following two new bribery allegations, first in Iraq then Poland. All this and China, too.
One bribery allegation may be regarded as a misfortune, two looks like carelessness. Three suggests serious underlying problems. Yet strangely, I don’t expect the allegations to do too much long-term damage to the investment case for Glaxo (even if more follow). Last year’s troubles in China did only short-term harm. Company scandals come and go, but the global population is still ageing and barriers to entry in the pharmaceutical sector are immense, so long-term investors have little to fear.
Desert Storm
With a solid operation like Glaxo, you have to exploit moments like these, they don’t come along that often. Happily, it’s unlikely to deter Glaxo from seeking greater access to fast-growing emerging markets. It recently announced a major investment programme in sub-Saharan Africa, where it plans to build up to five factories in countries such as Ghana, Ethiopa and Rwanda, to take advantage of what could be the next major growth region. That is a nice reminder of the scale of its global reach and ambitions.
Glaxo has seen minor victories and defeats lately. One positive is the recently-touted government plan to allow drug companies to fast-track breakthrough treatments to seriously ill patients. This was balanced by a defeat, a disappointing clinical trial for its therapeutic cancer vaccine MAGE-Ad. The damage was limited, however, because the market always saw this as a high-risk pipeline opportunity.
Three Wrongs Make A Right Time To Buy
Glaxo is the ultimate UK blue chip. Nevertheless, it has trailed the FTSE 100 in recent years. It is now down 5% over the last 12 months, against a 4% rise on the index. Over five years it returned 51%, against 62% on the index. That doesn’t worry me too much. I would rather buy Glaxo when it is on a downer, and better value, than when it is on an upper.
The bad news has pumped up Glaxo’s yield to a whopping 5.1%, against 3.6% for the index. Forecast earnings per share growth look disappointingly flat this year, but should revive to a chunky 8% next year, puting Glaxo on a forecast yield of 5.5% by December 2015. To put that in context, the average savings account currently pays just 0.62%.
Despite the recent dip, Glaxo remains the same rock-solid UK-listed pharmaceutical giant with a global reach and a generous income stream. A stock you can buy and set aside to fund your retirement. The only key difference is that it is 5% cheaper than one week ago. At this price, you can’t go far wrong.
