Pharmaceutical giant GlaxoSmithKline (LSE: GSK) has just published its first quarter results, and investors are underwhelmed. The stock is down 2.64% after a mixed set of numbers, made worse by the currency impact of a strengthening sterling. Does that deter me from hailing it my buy of the decade? Certainly not.
Drugs do work
Glaxo delivered sales of £7.2bn across Q1, a rise of 4% at constant exchange rates (CER), but a drop of 2% at actual exchange rates (AER), thanks to the pound getting back its bounce. Sales grew across all three of its businesses, Pharmaceuticals, Consumer Healthcare and Vaccines (the smallest of the three but growing fastest at 13% CER).
Adjusted operating margins rose 1.3 percentage points to a healthy 26.6% at CER, although down 0.2 points at AER. Total earnings per share (EPS) fell sharply, by as much as 33% at CER and 48% at AER, although the group said this reflects the revaluation of its Consumer Healthcare business following the agreement to acquire full ownership. Adjusted EPS grew 11% at CER, beating estimates, while down 2% at AER.
Free cash flow disappointed, plunging 50% to £324m, reflecting the £317m vaccine sales milestone payment to Novartis.
Cash flows
Glaxo declared a dividend of 19p for the quarter and remains on course to pay out 80p across 2018, for the fifth consecutive year. City analysts are expecting a slight uplift to 80.33p in 2019, but that will depend on the group boosting its free cash flow. Right now, it is prioritising R&D as it looks to extend its drugs pipeline. The current forecast yield of 5.6%, covered 1.3 times, hardly needs beefing up. There are higher yielding FTSE 100 stocks out there, though.
CEO Emma Walmsley said Glaxo continued to make good progress, with CER sales growth across all three businesses. She added: “We are strongly focused on commercial execution with encouraging starts for our most recent new product launches, Shingrix, Trelegy and Juluca.”
Good health
Continued cost discipline helped boost Glaxo’s adjusted operating margin at CER. Meanwhile acquiring full ownership of the Consumer Healthcare business should “improve future cash generation and support capital planning for the Group’s main priority to strengthen the Pharmaceuticals business and R&D pipeline,” Walmsley said.
One of the big issues relates to when generic competition to its blockbuster US treatment Advair emerges. Glaxo reported increased pricing and competitive pressures in the US inhaled respiratory market during Q1, predicting a 30% decline in sales, while a mid-year introduction of a substitutable generic competitor to Advair could knock adjusted EPS to around 3%.
Keep taking the tablets
Glaxo won’t be the only FTSE 100 company punished by sterling’s recovery and if interest rates rise and Brexit negotiations make progress, there could be more to pain on that front. However, I prefer to buy on bad news rather than good.
Walmsley appears to have a tight grip on the business and recent product launches sound positive. You don’t often get the opportunity to buy Glaxo at a forward valuation of just 13.5 times earnings. That is why I reckon that it remains a great buy-and-hold for the next decade and beyond.
