How Much Higher Can GlaxoSmithKline plc Go?

Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish which direction there shares are likely to move.

Today I’m looking at GlaxoSmithKline plc (LSE: GSK) (NYSE: GSK.US) to ascertain if its share price will continue to rise.

Market sentiment

At present, the market has mixed feelings about Glaxo. On one hand, the company’s recent deal with Swiss pharmaceutical company Novartis excited investors. On the other hand, Glaxo continues to face allegations of bribery from governments around the world, and these accusations are inevitably worrying some investors.

What’s more, Glaxo’s sales continue to decline following the loss of exclusive manufacturing rights for a number of the firm’s key treatments. The UK’s largest healthcare company posted a 10% sales decline in the first quarter, although for the most part this decline was a reflection of sterling’s strength against the dollar and euro. At constant exchange rates, total sales only fell 2%.

Still, despite these accusations and sliding sales, parts of Glaxo’s underlying business remain strong. For example, Glaxo’s R&D boffins have brought a total of seven new drugs to market within the past 16 months and the Novartis deal should improve Glaxo’s long-term outlook.

In particular, the deal between Novartis and Glaxo will see the consumer divisions of the two biotechnology giants merge, creating a ‘world-leading’ consumer healthcare business with £6.5bn in revenue in 2013.

In addition, Novartis is acquiring Glaxo’s oncology portfolio for $14.5bn and Glaxo is using $5.25bn of this cash to acquire Novartis’s vaccines business. Further, Glaxo’s management has promised to return £4bn to investors as part of this deal.  

City expectations

Despite the deal with Novartis and the new drugs Glaxo has brought to market, the City still expects that the company’s pre-tax profit will fall to £6.3bn for this year, down from £6.7bn last year. However, forecasts predict that Glaxo will return to growth during 2015, when the firm’s pre-tax profit is expected to jump 11%, to just under £7bn.

Based on these figures, I calculate that Glaxo is trading at a forward P/E of 15.5 for this year and 13.9 for 2015, which makes the company appear  cheap when you consider that the biotechnology sector trades at an average P/E of 17.6.

Moreover, Glaxo currently offers a juicy dividend yield of 4.8%, expected to hit 5.2% by 2015. Investors are still waiting to hear whether the £4bn cash return promised by management from the Novartis deal will take the form of a special dividend or share buyback.

Possible headwinds

As mentioned above, the biggest threat currently facing Glaxo is the accusations of bribery within several countries, including the world’s largest market, China. Indeed, Chinese police have just accused a British Glaxo executive of ordering staff to pay bribes. Glaxo’s management has made changes to the way it sells treatments to ensure that such things never happen again, but the company still faces the possibility of legal sanctions in both the UK and US if bribery allegations are proven.

Foolish summary

Overall, based on Glaxo’s low valuation in relation to the wider sector and the company’s deal with Novartis, I feel that Glaxo’s shares will continue to rise. 

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In the meantime, please stay tuned for my next verdict.

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