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Is Hikma Pharmaceuticals Plc Now A Better Buy Than GlaxoSmithKline plc?

Following share price gains of 25% since the turn of the year and a promotion to the FTSE 100, Hikma (LSE: HIK) is gaining a lot of attention among investors. Certainly, its bottom line has grown considerably in recent years and investor sentiment has improved significantly as a result. However, is it really now a better buy than Footsie veteran, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US)?

Track Record

As mentioned, Hikma has a stunning track record when it comes to bottom line growth. For example, it has averaged annual growth in earnings of 33% per annum over the last five years, which is a very impressive result given that many pharmaceutical companies are struggling to replace the loss of key, blockbuster drugs.

In fact, GlaxoSmithKline has struggled to an extent with this problem. Evidence of this can be seen in its disappointing performance during the same period, with its bottom line growing by around 8% per annum in the last five years. Although this is much better than many other pharmaceutical stocks that have seen their profits decline at a rapid rate, it is still some way behind the performance of Hikma.

Valuation

However, where Hikma comes unstuck is with regard to its valuation. In fact, it is hardly surprising when you consider that Hikma has seen its share price soar by a whopping 330% in the last five years, with its price to earnings (P/E) ratio of 25.7 being the end result. And, even though its past performance has been superb, it is forecast to increase its bottom line by just 6% in the current year, followed by 15% next year. Although not a disappointing outlook, it is difficult to justify such a high P/E ratio given Hikma’s medium term earnings forecasts.

Meanwhile, GlaxoSmithKline offers a more enticing valuation, with its shares currently trading on a P/E ratio of 17.4. And, with its bottom line forecast to rise by 6% next year, it could be on the cusp of improving performance following a tough few years.

Income Potential

While GlaxoSmithKline is one of the most popular income stocks in the FTSE 100, Hikma is unlikely to appeal to dividend-seeking investors. That’s because it yields just 0.8%, while GlaxoSmithKline yields a much more impressive 5.1%.

As such, and also because it offers better value for money and improving prospects, GlaxoSmithKline appears to be the better long term buy. Certainly, Hikma could be a strong performer moving forward but, in terms of which is the stock to buy right now, the FTSE 100 veteran seems to appeal more than the newbie.

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Peter Stephens owns shares of GlaxoSmithKline. 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.