GlaxoSmithKline (LSE: GSK) shares have delivered disappointing returns for investors recently. Back in late February, GSK’s share price fell below 1,200p. That’s a long way below the 1,800p level the shares were trading at in January last year.
Today, however, GlaxoSmithKline shares have spiked higher. As I write this, GSK’s share price is up about 6%. So, what’s going on? And do the shares offer value right now?
GSK: activist investor gets involved
The reason GSK’s share price has jumped today is that the Financial Times has reported that activist hedge fund Elliott Management has taken a multi-billion pound stake in the FTSE 100 healthcare company.
Elliott Management is an American firm run by billionaire Paul Singer. It is renowned for taking large stakes in major companies that are not achieving their full potential and forcing changes to improve performance.
In the past, it has invested in a number of other UK firms including Whitbread, where it called for Costa Coffee to be split off, and BHP, where it called for the company to make a few changes.
Why has Elliott Management taken a GSK stake?
It doesn’t surprise me that Elliott Management is targeting GlaxoSmithKline.
For starters, the company has struggled to grow its earnings in recent years. Adjusted earnings per share (EPS) dropped 4% last year. Meanwhile, in February, the group advised that for 2021, it expects a decline of a mid-to-high single-digit percentage in adjusted EPS. Some analysts are concerned about the group’s acquisition strategy.
Second, shareholder returns have been poor recently. Just look at the share price of GSK versus that of rival AstraZeneca. Over the last five years, AZN is up about 80%. Over the same period, GSK is down about 10%. That’s a disappointing performance. Meanwhile, there has been no dividend growth for years now.
Third, there’s a lot of uncertainty around the company’s plans to break itself up into two different businesses in 2022 (a pharma company and a consumer healthcare company). Glaxo has said that dividends are likely to be lower after the break-up, which will have spooked a lot of investors. Bloomberg Intelligence believes Elliott may push for cash to be returned to shareholders through an Initial Public Offering (IPO) rather than a spin-off. Alternatively, Elliott could try to force a sale of the pharma business, Bloomberg Intelligence says.
As for whether Elliott Management will be able to have a big impact on Glaxo, and its share price, it’s too early to tell right now. Sometimes, activist investors are able to add a lot of value for other shareholders. Other times, they don’t have much success.
Do GSK shares offer value right now?
In terms of whether GlaxoSmithKline shares offer value right now, I think they probably do. Currently, the consensus EPS forecast for 2021 is 102p, which means that at the current share price, the forward-looking price-to-earnings (P/E) ratio is about 13.4. That’s an undemanding valuation. By contrast, the median forward-looking P/E ratio for the FTSE 100 is about 16.7, according to Stockopedia.
Having said that, Glaxo isn’t a stock I’d buy today. Given the uncertainty over the forthcoming split, there are other stocks I’d buy before GSK.
