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Should You Dump AstraZeneca plc In Favour Of GlaxoSmithKline plc?

gskGlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US) have both had very different fortunes since the beginning of the year. On one hand, AstraZeneca’s shares have surged higher around 15%, beating the FTSE 100 approximately 14%. On the other, Glaxo has floundered, rising a lacklustre 5%.

But after this impressive performance, are AstraZeneca’s shares overvalued and should you dump your holding in favour of larger peer Glaxo? 

A quick look at valuation

The quickest way to gauge whether or not AstraZeneca is overvalued is to take a look at the company’s valuation, although this is by no means a definitive analysis.

At present, Glaxo is currently trading at a forward P/E of 15 for 2014, in comparison, AstraZeneca is trading at a forward P/E of 15.7, which does not seem overly expensive at first glance.

However, AstraZeneca’s earnings per share are expected to fall around 14% during 2014, while Glaxo’s EPS are forecast to remain unchanged, implying that AstraZeneca should actually be trading at a discount to Glaxo. Additionally, Glaxo’s dividend yield now stands at 4.7%, AstraZeneca’s yield currently sits at 4.1%, rising to 4.2% next year. 

The fundamentals support Glaxo

AstraZeneca has been grappling with sliding sales for some time now, thanks to the loss of exclusive manufacturing rights for a number of its treatments. Actually, according to the company’s own management, sales are going to continue to decline for some years to come. Specifically, AstraZeneca’s CEO Pascal Soriot does not expect AstraZeneca’s revenue to return to 2013 levels until 2017. This implies that the market is placing too much of a premium on the company.

Further, AstraZeneca only brought 11 treatments to Phase III trials during 2013 but none of these new products will file for regulatory approval before 2016. In comparison, Glaxo had five new drugs approved for sale during 2013 and a further 40 are in late stage development. With this being the case it would appear silly to suggest that AstraZeneca should trade at the same valuation as Glaxo, which it currently does. 

Summary

All in all, looking at the evidence above, I feel that perhaps investors should dump AstraZeneca in favour of Glaxo.

With multiple new treatments coming to market over the next few years, sales continuing to expand and a dividend yield of 4.7%, Glaxo would appear to be a better choice than AstraZeneca, which continues to report sliding sales and boasts an unimpressive treatment pipeline. 

If you're looking for other options

Overall, I feel that thanks to its hefty free cash flow and pipeline of treatments under development GlaxoSmithKline is your better bet for income and growth during the next few years. 

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> Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in GlaxoSmithKline.