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Is the GSK share price primed to beat the FTSE 100?

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Investor sentiment towards pharma stock GlaxoSmithKline (LSE: GSK) has improved significantly in recent months. In fact, it’s been able to outperform the FTSE 100 in the last six months, recording capital growth of 17%, while the index has risen just 3%.

Looking ahead, further outperformance of the FTSE 100 could be ahead. The company appears to offer good value for money, as well as an improving financial outlook. As such, it could be worth buying alongside a sector peer which reported positive results on Thursday.

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Positive outlook

The company in question is animal genetics specialist Genus (LSE: GNS). Results for the year to 30 June showed further improvements in sales and profitability, with revenue up 6% to £470.3m, while profit before tax moved 9% higher to £75.9m. The company experienced strong bovine revenues, rising 11% in constant currency. Porcine revenues moved up 1% in constant currency as the business continued to deliver its growth strategy.

Looking ahead, the company continues to see growth opportunities. The successful launch of its sexed semen product, Sexcel, in September 2017 has the potential to improve its financial performance in the medium term. And while there have been challenging operating conditions for some of its customers due to trade disputes, its overall outlook appears to be positive.

With Genus forecast to post a rise in earnings of 6% in the current financial year, it appears to have a bright outlook. With demand for its products likely to increase in the coming years, it could benefit from a tailwind which helps to boost its sales and profitability. As such, now could be a good time to buy it.

Growth potential

Prospects for the GlaxoSmithKline share price also seem to be positive. Although the pharma stock has risen significantly in recent months, it continues to offer a wide margin of safety. For example, it has a dividend yield of 5%, and a price-to-earnings (P/E) ratio of around 15. These figures suggest that it could offer further growth potential due, in part, to the strategy it’s being pursuing.

The company is seeking to restructure in a bid to make itself more efficient. It intends to focus on a more limited range of potential treatments within its pipeline, where it believes the risk/reward ratio is more appealing. It’s aiming to reduce costs by around £400m per year, which could help to deliver a rising bottom line over the medium term.

With GlaxoSmithKline’s dividend having been frozen since 2014, it now has a dividend coverage ratio of around 1.4. This suggests that dividend growth could be ahead for the company over the next few years, which could act as a catalyst on investor sentiment. With strong defensive characteristics (should the world economy’s growth rate slow down), the prospects for the stock seem to be bright.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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