Is GlaxoSmithKline plc More Likely To Double In Value Than Hikma Pharmaceuticals Plc?

GlaxoSmithKline plc (LON:GSK) is less likely to deliver higher returns than Hikma Pharmaceuticals Plc (LON:HIK) over the medium term, argues Alessandro Pasetti.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

GlaxoSmithKline (LSE: GSK) and Hikma Pharmaceuticals (LSE: HIK) have been under the spotlight for different reasons this week. The shares of both have risen, yet Hikma is the one that has sent a clear message to investors: as it bulks up, its 10-year rally may last for a very long time..!

Glaxo, meanwhile, must shrink to deliver rapidly rising returns to its shareholders. 

Glaxo: A More Aggressive Strategy Is Needed

Glaxo’s market value has risen 4.5% from its one-year lows since Wednesday, when a decent trading update confirmed 2015 earnings guidance and the outlook for 2016. The HIV and consumer healthcare businesses fared better than the reminder of its portfolio, but its second-quarter results were a mixed bag — and analysts did not buy into its story.

S&P Capital IQ, Society Generale and Deutsche Bank joined those in the bear camp, downgrading the stock soon after the results came out. Going with estimates from these three brokers, the shares would be fairly valued somewhere in the region of 1,250p and 1,450p. Glaxo stock currently trades at 1,390p, but market consensus estimates assign to it a possible valuation of 1,500p, according to Thomson Reuters estimates.

There’s merit in a view that suggests limited capital appreciation: assuming Glaxo reports underlying operating income at between £6bn and £7bn annually until 2017, while maintaining a steady operating margin at 25% over the period, the value of its stock plus net debt per share would be about 12/13 times the value of its forward Ebit. Its underlying profits could be lower, though, which would push up its relative valuation based on weaker fundamentals. Consider that the shares of Shire, for instance, trade at 20x based on the same metric, but on stronger fundamentals. 

To achieve a much higher valuation, Glaxo needs to report higher margins, a steeper growth rate for its operating income or a combination of both — or, alternatively, it should spin off its prized assets. Otherwise, it may well continue to be a decent yield play — the dividend is covered by core earnings — but I doubt capital gains could be meaningful. 

Hikma is a different story. 

Hikma’s Stellar Performance 

There was always a chance that the shares of Hikma would have enjoyed a great run on the market even before the announcement of its $2.65bn acquisition of Roxane Laboratories and Boehringer Ingelheim Roxane on Tuesday.  

Its core earnings were expected to grow on average at 20% a year into 2017. Which means that, assuming constant trading multiples, its shares could have reach 3,268p from 2,100p — the price at which its stock traded before the acquisition of the US specialty generic drugs business was announced.

The deal, which shows a wise capital allocation strategy and an appropriate cash/equity financing mix, contributed to a 15% rise in its stock price this week. 

Even though its valuation was already a tad rich before this week’s rise — considering the growth rate for sales, earnings and margins since 2013 — its seven-year operating performance has been truly impressive, boosted by acquisitions, which play a very important role in its corporate strategy. Consider that since the business was floated in 2005, its stock’s performance reads 762%. 

It may take less now to record a similar performance.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »