It’s miserable out there, if you’re a GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) shareholder. And I’m not just talking about the weather.
Bribery scandals and global outrage don’t tend to bode well for a company’s share price. The pharmaceutical giant clearly made the mistake of annoying the wrong people in China last year — and as is so often the case, that scandal has opened a can of worms that Glaxo can’t contain. This weekt, after spilling over the continents from China to Poland, the ripple effects finally landed right on GSK’s doorstep.
But while GlaxoSmithKline’s misdemeanours are very serious — and demand the utmost scrutiny from the Serious Fraud Office’s investigations — shareholders need to remain rational. It’s times like these that often send nervous traders into a tailspin… and present opportunities in the stock market for brave and patient investors.
Bad news, allegations and newspaper headlines often cloud the most straightforward of judgments that investors need to make. It’s very easy to focus on near-term risks, when the questions we really need to ask span decades, not months. It really boils down to this question:
Is GlaxoSmithKline a good business; is it worth more than its £80bn price tag; and is and investment here likely to produce superior returns over the next decade or more?
One of the massive bets that put legendary investor Warren Buffett on the map was American Express in 1963. Undoubtedly one of the world’s finest enterprises, Am-Ex shares tanked by 50% that year, as the company became embroiled in the “Salad Oil Scandal”. The details of that controversy aren’t important enough to drone on about here — nobody thinks of that scandal when they think of the payments giant today.
And that’s the point. Warren Buffett loaded up on the shares, buying 5% of the company — and his investment appreciated ten-fold over the following decade. He bought during a scandal which sent a great share tumbling, when everyone else was selling.
Could we have a similar case on our hands at GlaxoSmithKline today? It’s clear that if found guilty of bribery, there will be significant financial consequences for GSK. But is it really likely to derail an investment on a timescale of seven to ten years? Will we really be reflecting on this bribery scandal in 2024?
In my view, that’s not the case. Trading at less than 15 times earnings, and offering a market-beating 4.8% yield, I think we’re getting a good — if not spectacular — deal with GSK today. Unlike American Express in 1963, it’s clear that recent allegations have subdued, rather than smashed, Glaxo’s market value.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Mark does not own any shares in this article. The Motley Fool has recommended shares of GlaxoSmithKline.