“On 6 May we attended the consumer part of GSK’s investor event, hosted by Emma Walmesley, CEO of GSK Consumer Healthcare,” analysts at Royal Bank of Canada wrote in research published today, adding that “in many respects it was just like any other consumer company presentation.”
Consumer healthcare generates about 20% of GlaxoSmithKline‘s (LSE: GSK) revenues, and marginally contributes to its valuation, which is more appealing than that of consumer staples such as Unilever (LSE: ULVR) and Diageo (LSE: DGE), I’d argue. Here’s why.
Glaxo
Glaxo is more profitable than Unilever, with forward operating margins expected to be in mid-20s into 2016. And whilst it’s less profitable than Diageo, it’s financially stronger.
Revenues are unlikely to grow much, and that’s not too different an outlook from that of Diageo and Unilever.
Glaxo’s forward yield is forecast to hover around 5%–5.5% between 2015 and 2017 — and such forecasts are accurate, in my view. At 21x and 11x forward earnings and adjusted operating cash flow, respectively, its stock could be considered as part of a diversified portfolio, although its earnings per share could come come under pressure this year.
The stock is up 4% so far in 2015, but has lost 12% of value over the last month, as analysts have become more bearish about its short-term earnings prospects. If you are after long-term value, there’s little you should worry about at this price, however.
Finally it has long been debated whether Glaxo should hold less cyclical consumer assets, and upside could certainly come from spin-offs. Investors are nervous, though, and a change of management would benefit Glaxo’s own valuation.
Unilever
Unilever’s forward operating margins are expected to be in the range of 15% this year and next. Revenues may grow at a faster pace than at Glaxo and Unilever, but the price to pay for a steeper growth rate is a lower forward yield, in the region of 3%, although that is based on sustainable cash flows.
At 21x and 14x forward earnings and adjusted operating cash flow, respectively, Unilever is less attractive than Glaxo, but is a more promising investment than Diageo, based on the conditions of its end markets and the lower level of cyclicality of its core products.
Unilever’s shares have risen 11% in 2015, but they are down 2% in the last month of trading. One element to consider is that with Unilever you’d likely add less risk to your portfolio than with Glaxo.
Diageo
Diageo’s forward operating margins are expected to be very close to 30% in the next couple of years, but I am concerned about its growth rate for revenues, which will likely be a drag both on margins and on its equity valuation.
A generous dividend policy and relatively high leverage render Diageo a less appealing investment than Glaxo and Unilever. Its shares have lost 2% of value this year, and about 4% in the last four weeks.
At 3%, its forward yield also signals risk rather than an enticing yield opportunity, based on fundamentals.
At 21x and 15x forward earnings and adjusted operating cash flow, Diageo is less attractive than Glaxo and Unilever, unless it manages to grow at a faster pace via acquisitions — but that, in turn, would heighten the its risk profile.
