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Why I’d Buy GlaxoSmithKline plc Before Dechra Pharmaceuticals plc Or Al Noor Hospitals Group PLC

For investors in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), the last few years have been very challenging. That’s because the company’s bottom line has fallen by 17% during the last three years as sales have come under pressure from generic products for a number of its key, blockbuster drugs. As such, investor sentiment has also declined, pushing GlaxoSmithKline’s share price down by 6% since the start of 2012 versus a rise of 22% in the wider index.

In comparison, healthcare peers such as Dechra (LSE: DPH) and Al Noor (LSE: ANH) have performed much, much better. For example, Dechra is up 86% since the start of 2012, while Al Noor has seen its share price rise by 67% over the same time period.

Despite this, I’m more bullish on GlaxoSmithKline’s future prospects, and I would buy it ahead of Dechra and Al Noor. Here’s why.

A Step Change

While 2015 is set to yield more pain for GlaxoSmithKline, 2016 is due to be a marked improvement compared to previous years. So, while the company’s share price may remain relatively weak in the short run as the market sees its bottom line fall by an expected 14% this year, investors could begin to look ahead to 9% earnings growth for next year and bid up the price of the company’s shares.

And, with further cost cutting set to take place, GlaxoSmithKline’s medium term outlook also appears to be positive – especially when you consider that it has a diverse and robust pipeline that includes drugs with considerable future sales prospects, such as HIV treatments within its ViiV Healthcare subsidiary.

Furthermore, GlaxoSmithKline’s earnings growth prospects compare favourably to those of Dechra and Al Noor. They are expected to increase their bottom lines by 11% and 14% respectively next year and, while both figures are ahead of GlaxoSmithKline, their valuations are less appealing than their larger health care peer.

Valuations

For example, GlaxoSmithKline trades on a rather lowly price to earnings (P/E) ratio of 16.9, while Dechra and Al Noor have P/E ratios of 24.6 and 18 respectively. Certainly, their bottom line growth should be slightly higher than that of GlaxoSmithKline, but neither company offers the diversity, financial strength or income potential of their peer and, as such, it would be of little surprise for GlaxoSmithKline to see its rating moved upwards at a faster rate than Al Noor or Dechra.

Income Prospects

As mentioned, GlaxoSmithKline has better income prospects than Dechra or Al Noor. For example, it has a yield of 6.4% at the present time, versus 1.7% (Dechra) and 1.5% (Al Noor). And, with interest rates unlikely to move significantly higher over the medium term, investor demand for yields could push GlaxoSmithKline’s shares higher – especially since it is one of the best-yielding and historically most reliable income stocks on the FTSE 100.

Looking Ahead

So, while the last three years have been hugely disappointing for GlaxoSmithKline, its future appears to be very bright. That’s not to say that Dechra and Al Noor will not see further share price gains, but if I could only buy one of the three, my money would be on GlaxoSmithKline to be the best performer over the medium to long term.

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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.