Today I’ll be taking a closer look at pharmaceutical giant GlaxoSmithKline (LSE: GSK), product testing specialist Intertek (LSE: ITRK) and engineering firm Weir Group (LSE: WEIR). Is it the right time to invest in any of these companies?
Breathe easier with Glaxo
Earlier this week drugs giant GlaxoSmithKline announced the opening of a new £56m manufacturing facility in Ware, Hertfordshire, creating 150 new jobs. That’s good news for a firm battling against a patent cliff and seeking to rejuvenate its product pipeline. The new facility will be an expansion of the firm’s existing plant which produces Ellipta inhalers for asthma sufferers, and will almost double production to at least 37m a year by 2017. Most of these inhalers will be for export, with Glaxo supplying to over 74 countries.
Glaxo shares have enjoyed a decent rally in recent months, gaining 11% since last October. This might not seem like much, but for a defensive stalwart like Glaxo it represents significant movement. When shares move higher they become less attractive to new investors, and on Friday Swiss investment bank UBS confirmed its ‘neutral’ stance on the shares with a price target of £14.20, which incidentally is below the current market price
I personally still think the shares are attractively priced, not for growth, but income. Consensus forecasts for the next couple of years suggest prospective dividend yields in excess of 5%. This coupled with Glaxo’s defensive qualities mean the shares are an ideal low-risk income play.
Inspection & testing services specialist Intertek reported an encouraging set of results last month despite revealing a pre-tax loss of £308m. The FTSE-100 listed firm announced its full-year results for the 12 months to 31 December 2015 with a 3.5% rise in revenue to £2.17m, and a 7% rise in underlying earnings. However the figures were marred by the £308m pre-tax loss, largely due to a non-cash impairment charge of £577m.
The shares have performed well over the past year gaining around 24%, but will the upward trend continue, or will gravity pull them back down to earth? Well, our friends in the City seem to think the steady growth will continue, with an 8% rise in earnings predicted this year, followed by another 6% pencilled-in for 2017.
So far, so good, but are the shares priced to buy? Unfortunately not. Intertek trades at a forward price-to-earnings (P/E) ratio of 21 for this year, falling to 20 next year, which in my opinion is too high given the modest near-term growth outlook.
Engineering group Weir has been facing tough times recently, with a disappointing set of results for 2015, and another difficult year predicted for 2016. Full-year results revealed a 21% fall in revenue to £1.92bn coupled with a pre-tax loss of £200m, compared to £149m profit a year earlier.
The Glasgow-based firm expects 2016 to be another challenging year, and analysts in the City agree. Market consensus points to a 27% decline in earnings this year, followed by a 13% bounce next year. This would put Weir on a forward P/E ratio of 19 for this year, falling to 17 for the year ending 31 December 2017.
Despite a 33% decline in the share price over the last 12 months, the P/E rating is still higher than in recent years, largely due to the large drop in earnings last year. In my view it’s still not the right time to buy.