After falling 14% in 2014, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) certainly won’t have made you rich this year.
AstraZeneca (LSE: AZN) (NYSE: AZN.US) has put on a spectacular show, by contrast, rising 26% this year.
Glaxo loses, Astra wins. But who will come top in 2015?
All That Glisters
Glaxo is due a good year. Its shares are up just over 3% over five years, a shockingly poor performance from a FTSE 100 stalwart.
A couple of years ago, AstraZeneca was thought to be the one in trouble, thanks to falling profits and a failing drugs pipeline. Now it’s the UK pharma golden boy, up 60% over five years. Astra has the momentum, but Glaxo tempts my contrarian instincts.
Glaxo has been caught up in the recent sell-off, taking its price/earnings ratio to below 12 and its yield to a tempting 6%. Given the shrinking chance of a base rate hike next year, it is almost worth buying on income alone.
Management is frantically restructuring, as it looks to put the bribery scandal behind it, reverse falling US revenues, and focus on its core disease areas such as respiratory, infectious diseases, vaccines and consumer healthcare.
Earnings per share (EPS) look set to fall 18% this year, but are forecast to claw their way back to zero in 2015.
Glaxo has a big job on its hands, especially with a recent drop in R&D productivity, and a hefty debt-to-equity ratio of 2.57. The key question is whether it can reverse its sliding earnings. That’s in the balance right now.
But if Glaxo does show Astra-like powers of recovery, it could make you rich in 2015 and beyond.
The numbers look far nicer at AstraZeneca, with strong share price growth, a 4% yield, 14.4% operating margins, and 33% return-on-capital employed.
The only blot is a Glaxo-like 17% drop in EPS this year, followed by another 4% in 2015. Every time another patent expires, a little piece of Astra’s EPS dies.
It needs to keep the new drugs flowing, but there is good news on that score, with 107 projects in the clinical phase of development.
At 14 times earnings, Astra is valued more highly than Glaxo, and rightly so. These two companies have undergone a dramatic role reversal lately. Glaxo is now the riskier stock, but at today’s reduced price, potentially more rewarding.
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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.