Beginners Portfolio: GlaxoSmithKline plc vs AstraZeneca plc

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The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.

gskI added GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) to the Beginners’ Portfolio back in June 2012, and in almost two years since, with the share price standing at 1,665p today, we’ve seen only a 10.7% gain (including dividends and after all costs we’d incur both buying and selling). That’s about level with the FTSE overall, but I really was hoping to do better than that.

By comparison, shares in AstraZeneca (LSE: AZN) (NYSE: AZN.US) have outstripped the FTSE, with a gain of around 50% — until news of the recent bid approach hit, since when they’ve powered up to a two-year 75% gain to reach 4.656p. In fact, AstraZeneca shares are up nearly 40% over the past 12 months alone.

The Soriot effect

The takeover bid was from Pfizer, and although the firms were talking about a valuation of £60bn, it really was only tentative. AstraZeneca boss Pascal Soriot doesn’t sound too keen on accepting a bid, and Pfizer now was until 26 May to make a firm offer or walk away.

AZNThe impressive Mr Soriot, of course, is the force behind the new confidence in AstraZeneca — since he put in place a plan to refocus on core competences, the bullishness has returned and it is hoped the company will return to earnings growth quicker than previously expected.

So did I make the wrong choice?

Well, GlaxoSmithKline has been in the news for good reasons itself, with its recent deal with Novartis looking great.

Glaxo looks better value

And if we compare the current valuations of the two companies, we do see a bit of a mismatch. The Soriot effect coupled with the Pfizer approach has pushed AstraZenenca shares up to a forward P/E valuation of 19 based on forecasts for the current year — and with earnings looking set to fall for another couple of years (after a big drop over the past two years), that multiple will get toppier and could easily reach 20.

GlaxoSmithKline shares, on the other hand, are rated on a P/E of only 15.5 for this year, dropping to under 14 for 2015 — and Glaxo should be growing its earnings from 2015 after a flat two-year period. Dividends are in Glaxo’s favour too — at around 5%, yields are a whole percentage point ahead of Astra’s 4% levels.

It’s the long term that counts

The bigger picture is still in Glaxo’s favour for me, too. GlaxoSmithKline is better at venturing into new biotechnology, has a superior track record of acquisition, and appears more flexible in its outlook. AstraZeneca, on the other hand, has remained wed to the blockbuster drugs model — that might get the profits going again in the short term, but I reckon Glaxo’s flexibility sets it up better for the long term.

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Alan does not own any shares in GlaxoSmithKline or AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline.