Recovering GlaxoSmithKline plc Won’t Be Cheap For Much Longer


Pharmaceutical giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is one of those rock-solid stocks that you despair of being able to pick up at a bargain price.

It has routinely traded comfortably above 15 times earnings, with only very occasional slippage. But following recent travails, it is suddenly available at the bargain price of just 12.55 times earnings.

If that tempts you, you might want to act fast. Because Glaxo’s share price is already starting to recover and could soon be back to rude health.

I Feel Fine

Frankly, I’m amazed we have this opportunity at all. Then again, I hadn’t expected this reputable company to get caught up in a string of bribery and corruption scandals in China and beyond.

Glaxo got off relatively lightly in China with a £300m fine, but it may still face costly spin-off investigations in the US and UK.

As its stock is traded on US exchanges, it is vulnerable under the US Foreign Corrupt Practices Act, which is worrying, given the US propensity to slap massive fines on foreign companies.

Although with Glaxo leading the chase for an Ebola vaccine, the US may take a more benign view. Given the media frenzy, the authorities won’t want to do anything that might delay the drug’s release.

Big In Japan

The bribery scandal isn’t the only reason Glaxo is trailing. Profits have been down lately, although recent Q3 results were better than many analysts feared. 

Core operating profits fell 6% to £1.89bn, but it could have been worse, with markets expecting a bigger drop to £1.71bn. 

So there are still dangers, but they are also reflected in Glaxo’s share price, which is down 15% over the last six months, against a drop of just 4.5% on the FTSE 100 as a whole.

Glaxo is also fighting back with an ambitious cost-cutting plan, which should generate £1bn of savings every year for the next three years. Its long-term R&D and product helpline looks promising, and sales are growing strongly in emerging markets and Japan.

Today, you can buy into those recovery prospects at a mouth-watering discount.

One Mighty Yield

Glaxo may not be this cheap much longer, with the share price up more than 4% in the last week. But this still a good price, while the yield is a mighty 5.51%, one of the most generous on the FTSE 100.

Those numbers are worth repeating. Glaxo is available at 12.55 times earnings and offers a yield of more than 11 times Bank of England base rate.

This opportunity to load up on this long-standing FTSE favourite probably won’t last long, so don’t squander it.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.