It has been a terrible year for GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and more bad news could be around the corner. Indeed, even after being found guilty of bribing medical officials within China and being fined £300m, the company is still facing an investigation by British and American authorities.
Still, the conclusion of the Chinese bribery case and subsequent fine has removed much speculation and uncertainty about the company’s future. Some analysts had been worried that China would slap a huge fine on Glaxo, one so large that the company’s dividend payout would come under pressure. However, a £300m fine is manageable for Glaxo, which reported pre-tax profits of £6.6bn last year.
The best pick
With uncertainty removed, Glaxo has become a better pick than AstraZeneca (LSE: AZN) (NYSE: AZN.US) as the company looks attractive on several key valuation metrics, as well as fundamental factors.
In particular, at present levels Astra trades at a forward P/E of 16.5 as the company’s earnings per share are expected to fall by 14% this year. In addition, earnings are expected to fall a further 7% during 2015. Nevertheless, the market continues to speculate that US pharmaceutical giant Pfizer will make another attempt to acquire Astra, which explains Astra’s high valuation.
On the other hand, Glaxo trades at a forward P/E of 15, with earnings growth of 5% pencilled in for 2015. This puts the company on a 2015 P/E of 14.4. So, Glaxo is cheaper than its smaller peer, while Glaxo’s earnings are expected to grow faster over the next two years.
Then there’s Glaxo’s dividend yield, which is currently 5.4%, compared to Astra’s lowly 3.9%.
Bright future
Glaxo easily trumps Astra on valuation grounds but what about the company’s prospects? Well, analysts have consistently praised the strength of Glaxo’s treatment pipeline over the past 12 months, ranking it the best in the industry. The company has 40 new treatments under development in total. Then there’s the company’s joint venture with Swiss pharmaceutical giant Novartis, which will see the two groups create a world-leading consumer healthcare company.
Compared to Glaxo, Astra’s treatment pipeline is more specialist. However, the company’s management believes that the group has “one of the most exciting pipelines in the industry,” although Astra’s fast-evolving pipeline is focused on a new area of cancer research known as immuno-oncology. Only time will tell if Astra’s focus on these new treatments will pay off.
The bottom line
All in all, it has been a tough year for Glaxo but now the company has settled with Chinese authorities, things are looking up. With uncertainty removed Glaxo’s low valuation makes it a better pick than Astra, which looks expensive based on the company’s falling income. Moreover, analysts believe that Glaxo’s pipeline of treatments under development has plenty of potential.
