How GlaxoSmithKline plc Is Changing

What does the future hold for investors in GlaxoSmithKline plc (LON:GSK)?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

GlaxoSmithKline

Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 pharmaceuticals giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) — and what they mean for investors.

Sales stagnation

Many companies have found sales growth hard to come by in the difficult economic environment since 2008. Pharmaceuticals companies have had the additional hurdle of a period of expiring patents on some of their biggest money-spinning drugs.

As a result, GSK’s turnover for 2013 of £26.5bn was around £2bn lower than five years ago, and analysts see no growth over the next two years.

Changing the shape of the business

GSK is in the midst of repositioning its business to focus on products and geographies where it sees the best prospects for future growth. Non-core assets are being sold to focus on ‘priority’ products, and exposure to emerging markets is being increased.

The strategy can be seen particularly well in the group’s consumer healthcare division where 50 non-core products have been divested over the last two years, including over-the-counter medicines in the US, Canada and Europe, and Lucozade and Ribena, which are primarily marketed in western markets. At the same time, GSK has increased its stake in its consumer healthcare subsidiary in India from 43% to 75%.

Looking to the future

Now, there is a downside to GSK’s strategy. While operating profit margins in the US and Europe are running at 70% and 55% respectively, the margin in the group’s Emerging Markets & Asia-Pacific (EMAP) segment is 31%, and in the consumer healthcare division as low as 18%. As such, the bigger the contribution EMAP and consumer healthcare make to group sales, the more they will pull down the overall profit margin.

I don’t think this is a problem for long-term investors. GSK should be able to grow sales at a good clip in emerging markets in the coming decades, while the sales power of strong consumer brands is legendary.

Furthermore, margins in these areas do have some scope to rise from current levels, due to increasing scale in manufacturing and distribution in emerging markets, and the newly-focused consumer healthcare division’s sales and distribution synergies with pharmaceuticals.

After the recent period of sales stagnation, I’m expecting GSK’s repositioning of its business, and a strong pharmaceuticals pipeline of regulatory approvals and filings, to begin to deliver increasing turnover and profit growth from 2015.

A valuation of 14 times that year’s forecast earnings, with a prospective income of over 5%, doesn’t look unappealing to me for a company gearing up to return to growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »