The GlaxoSmithKline (LSE: GSK) share price is currently 1,560p and the AstraZeneca (LSE: AZN) share price is 5,850p. The companies have market capitalisations of £78bn and £77bn, respectively. They’re the Titans of London-listed pharmaceuticals firms. Indeed, they rank as the fourth and fifth largest stocks in the FTSE 100. But which do I think is the better buy today?
Encouraging start to the year
AstraZeneca released its first-quarter results today. There were some impressive headline numbers. Total revenue rose 11% at constant exchange rates, core operating profit was up 96% on strong margin improvement, and core earnings per share (EPS) increased 100%.
The company described the performance as an “encouraging financial start to the year,” and noted also that “our highly-productive and sustainable pipeline continued to deliver.”
Looking to full-year 2019
Advising that variation in performance between quarters can be expected, AstraZeneca reiterated its previous guidance for full-year 2019 core EPS of between $3.50 and $3.70 (271p-287p at current exchange rates, with 279p at the midpoint). The midpoint EPS would represent an increase of 4% on 2018 earnings, and put the stock on a forward price-to-earnings (P/E) ratio of 21 at the current share price.
Meanwhile, the prospective dividend yield on an anticipated unchanged payout of $2.80 (217p) would be 3.7%.
Rival full-year expectations
GSK will release its first-quarter results next week (Wednesday). As management’s guidance for full-year 2019 currently stands, we can expect a decline in underlying EPS of between 5% and 9% on 2018’s earnings (at constant exchange rates). This would imply EPS of 109p-113p, and at the midpoint 111p would put the stock on a forward P/E of 14 at the current share price.
Meanwhile, the prospective dividend yield on a management-guided unchanged payout of 80p would be 5.1%.
Looking to 2020
In terms of P/E, GSK (14) appears to offer considerably better value than AstraZeneca (21). Its dividend yield is also much superior: 5.1% versus 3.7%.
Looking ahead to 2020 forecast earnings, modest growth for GSK lowers its P/E to 13.5. And while the City consensus is for much stronger growth at AstraZeneca, the P/E remains comparatively pricey at 17.8. No increase in the dividend is forecast for either company, so GSK also retains its status as the superior yield pick.
Predictability and risk
Reading the range of City analysts’ earnings forecasts, as well as the consensus, it’s striking that the range around the GSK consensus is much tighter than the range around the AstraZeneca consensus. For the current year, the GSK high estimate is 8% above consensus, with the low estimate 7% below. In AstraZeneca’s case, the range is from +16% to -20%.
I think this tells us that GSK’s earnings are more predictable than its rival’s, and that AstraZeneca has higher risk of an earnings consensus miss, and a miss of greater magnitude — whether to the upside or the downside. That GSK’s earnings are more predictable makes sense, because unlike pureplay pharma AstraZeneca, it has a large consumer healthcare products business, with superior earnings visibility.
Bottom line
On balance, I see GSK’s valuation (and diversified business) as more attractive than AstraZeneca’s. Furthermore, due to its reasonable P/E and appealing dividend yield, I’d be happy to buy GSK today.
Conversely, I’m avoiding AstraZeneca at this time, on the view its P/E is just too elevated, particularly with the risk presented by the wide range of estimates around the earnings consensus. The inferior dividend yield is an added negative.
