The share price performance of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) over the last ten years has been hugely disappointing. That’s because it has risen by just 16% since December 2004, with even the FTSE 100 bettering it through having a capital gain of 34%.
Certainly, GlaxoSmithKline has paid a decent dividend in recent years, with it increasing in each of the last five years. However, investor sentiment has remained decidedly weak during a period when many pharmaceutical peers have performed relatively well due to their defensive characteristics and the uncertain nature of the stock market.
Slow Growth
One reason for the lack of investor interest in GlaxoSmithKline is its slow earnings growth. For example, in the last two years its bottom line has stagnated and, in the current year, it is forecast to post earnings that are down 18% on where they were last year. And, looking ahead to 2015, the situation seems unlikely to get much better, with GlaxoSmithKline’s bottom line expected to rise by a meagre 1%.
Long-Term Potential?
Of course, GlaxoSmithKline does have a strong pipeline of drugs. In addition, it has largely navigated through the ‘patent cliffs’ that have hurt sector peers such as AstraZeneca. As such, it could be argued that GlaxoSmithKline is all set for long-term growth, with specific divisions within the company holding significant appeal and having the potential to make a real difference to the company’s bottom line. One notable example is ViiV Health Care, GlaxoSmithKline’s HIV unit, which could even be spun-off, as the company seeks to rejuvenate investor interest in its offering.
Price Target
Clearly, a severe bear market could wipe off 38% of GlaxoSmithKline’s current value and send shares tumbling to £10 each, as was the case during the financial crisis. However, moving to £20 per share over the medium term could be a challenge, since GlaxoSmithKline does not appear to possess the near-term growth numbers in order for the market to rerate its shares upwards by around 45%, which is what is required in order for them to reach £20.
That’s not to say, though, that there is not upside potential over the medium term, or that GlaxoSmithKline cannot hit £20 per share in the long run. Both of these are very possible, since GlaxoSmithKline trades on a price to earnings (P/E) ratio of 14.9 which, when compared to sector peers such as AstraZeneca and Shire (which have P/E ratios of 17.3 and 20.4 respectively), indicates there is upward rerating potential.
In fact, were GlaxoSmithKline to trade on the same P/E ratio as AstraZeneca of 17.3, its shares would currently be priced at 1588p, while having the same P/E ratio as Shire would see them reach 1872p.
Looking Ahead
Of course, for an upward rerating to take place, GlaxoSmithKline needs to either stimulate its bottom line, restructure the business through a potential spin-off of ViiV Health Care in order to improve sentiment, or be the subject of a bid approach. With all three being decidedly possible (especially once GlaxoSmithKline gradually overcomes allegations of bribery and wrongdoing), its shares could move onwards and upwards. And, with a yield of 5.9%, its total return over the long run could be highly lucrative. As a result, GlaxoSmithKline could be worth buying right now.
