Is Fast-Growing Skyepharma PLC Better than Vodafone Group plc?

Small-caps like Skyepharma PLC (LON: SKP) can thrash returns from big-caps like Vodaphone Group plc (LON: VOD)

| 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.

Fast-growing pharmaceutical company Skyepharma (LSE: SKP) administered a dose of the right medicine this morning with its full-year results. Revenues are up 30% over the previous year, operating profit ballooned by 46%, and earnings-per-share before exceptional items rose 43%.

Impressive growth

Commeting on the results Skyepharma’s chief executive , Peter Grant, said,

“2015 has been a year of further substantial progress both operationally and financially.  Our proven expertise in developing innovative inhalation and oral products has given us a track record of growth that reinforces our optimism about the future.”

Over the past five years, Skyepharma’s shares have rocketed by around 1170%, which demonstrates just how lucrative small-cap investments can be when they click. That’s a much better performance on total returns than I can get from big-cap stalwarts such as Vodafone Group (LSE: VOD).

However, in its present form, the Skyepharma growth story could be about to reach the end of the line. The firm revealed today that it has reached agreement on the terms of a recommended merger with mid-cap pharmaceutical company Vectura Group. That will be a satisfactory outcome for long-standing Skyepharma shareholders, but new investors attracted by the growth story will be pinning their hopes on the fortunes of the enlarged group if the merger goes ahead.

Up with events

Although I think that Skyepharma has been a better investment opportunity than Vodafone in recent years, I would let the dust settle after the merger has taken place before investing in either Skyepharma or Vectura Group now.

Meanwhile, Vodafone’s valuation looks well up with events to me. City analysts following the firm expect earnings to grow 23% to march 2017 and by a further 28% to March 2018. The firm has invested a lot of capital to upgrade its networks and that seems to be paying off. However, at a share price of 220p, the firm’s forward price-to-earnings ratio sits at around 28 for 2017/18, a rating that seems to anticipate double-digit growth rates in earnings for years to come. I think such an outcome unlikely as Vodafone is not a small and nimble growth business like Skyepharma.

No solace in the dividend

Perhaps there’s reassurance in Vodafone’s dividend prospects. The firm expects to deliver a dividend yield of 5.3% in 2016/17 followed by 5.4% during 2017/18. That looks attractive but there is no full cover from earnings, just 0.5 times and 0.65 times respectively.

In February, Vittorio Colao, the firm’s chief executive, said, We continue to face regulatory and competitive challenges in many markets, but we are confident that the business is well positioned for the growth opportunities ahead.”

Vodafone is trading well, but the company’s valuation leaves no margin for error. As such, I see risk to the downside for investors and continue to avoid the shares myself. If the forward growth numbers miss a beat for some reason in the future, it’s easy to imagine Vodafone suffering a downward valuation re-rating that could see the firm trading on a lower P/E ratio.

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.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing For Beginners

Here’s how I’m trying to prevent a stock market crash from ruining my portfolio

Jon Smith explains which shares he's avoiding and what he's thinking of buying to try and protect his portfolio from…

Read more »

Bearded man writing on notepad in front of computer
US Stock

Call me crazy, but here’s why I’m eyeing up the CrowdStrike share price

Jon Smith notes the carnage caused by Friday's global outage, but flags up why he's thinks the CrowdStrike share price…

Read more »

Investing Articles

What do Hargreaves Lansdown results mean for the share price?

The Hargreaves Lansdown share price has surged in recent months on takeover expectations, but what will the recent results mean…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Newly minted S&P 500 stock CrowdStrike just crashed! Here’s why

Shares of S&P 500 firm CrowdStrike collapse as the company lies at the centre of a global IT outage. What…

Read more »

artificial intelligence investing algorithms
Investing Articles

Is Nvidia heading for the mother of all tech stock crashes?

Nvidia stock has soared, and the company briefly became the most valuable on the planet. But not everyone’s an AI…

Read more »

Dividend Shares

The BP share price is down 15% in 3 months. Time to buy?

In the space of just a few months, the BP share price has fallen by a double-digit percentage. Is this…

Read more »

Investing Articles

A 5.4% dividend bargain I’ll buy over Lloyds shares

Harvey Jones loves his Lloyds shares but now he's found a high-yielding FTSE 250 stock that may offer even more…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Recommended by Warren Buffett, this top hedge fund’s betting on Rolls-Royce shares

When Warren Buffett ended his previous investment partnership, he recommended Bill Ruane’s Sequoia Fund. Today, its largest investment is in…

Read more »