The eyes of many healthcare investors will be turned to the FTSE 100 giants right now, with AstraZeneca in particular enjoying a share price resurgence.
But GlaxoSmithKline (LSE: GSK) has put in a decent 2018 so far too, with a gain of 16%. Yet while it’s still got a long way to go to catch up with it’s big rival’s superior five-year performance, it has had a much better 2018 than some.
Profit squeeze
For instance, a profits warning in early August sent Spire Healthcare (LSE: SPI) shares into a tailspin, and the private healthcare provider’s shares have continued downwards to become one of Thursday’s biggest FTSE fallers. The price was down nearly 10% in early trading, taking the drop since 3 August to nearly 45%.
The original warning said Spire “expects EBITDA for the full financial year 2018 to be materially lower than for 2017,” but the scale of the drop so far has taken investors by surprise. Interim results on 18 September revealed a 20.6% fall to £66.1m, with adjusted earnings per share down a crushing 52.9%.
If that wasn’t bad enough, operating cash flow dropped by 21.5% and net debt rose 5% to £458m.
NHS cuts
The big problem is a decline in referrals from the belt-tightening NHS, with cutbacks in elective surgery (such as hip replacements) leading to a 10% drop in NHS revenues.
For the full year, City analysts are expecting a 44% fall in EPS which would put the shares on a pretty toppy P/E multiple of 19, though an optimistic outlook for 2019 could see a 30% rebound to drop the P/E to under 15.
The question is, are the shares oversold now and do future prospects make Spire look like an attractive proposition? Debt and liquidity are my biggest concerns.
The company has just sold the site of its former hospital at Whalley Range in Manchester for £4.05m (after costs) and that sum will be used to reduce net debt. And at the interim stage we were told that that “robust operating cash flows enabled us to continue to invest in our estate and our systems, as well as maintain the interim dividend” — although the final dividend is forecast to be cut.
I’m cautiously optimistic that 2019 could see some share price recovery, but there could be more pain first.
Recovery
Meanwhile, back at GlaxoSmithKline, its share price underperformance compared to AstraZeneca might seem surprising, especially considering that Glaxo managed a relatively speedy return to earnings growth. EPS has grown by 60% in the past two years, while the share price hardly moved — dropping the P/E from a little over 18 to under 12.
Confidence may well be hit by a couple of years of essentially flat forecasts, with fears perhaps of a double dip for earnings before we see a sustainable recovery.
But I still see Glaxo’s dividend prospects as a great attraction, especially for those investing for pension income.
Though the level of dividend cash has remained fixed during the earnings downturn, forecasts still suggest healthy yields of 5.2% this year and next, and they look well enough covered.
On P/E multiples of a little over 13, GlaxoSmithKline still looks like a top long-term pick to me.
