While GlaxoSmithKline’s (LSE: GSK) recent performance has been hurt by declining investor sentiment, the company appears to be doing all of the right things to turn its poor share price returns around. For example, it has initiated a major cost saving programme, which is expected to save around £1bn over a period of three years, and has postponed further dividend rises during the next couple of years so as to provide a greater amount of capital to reinvest in its pipeline.
In addition, GlaxoSmithKline initiated a review of its ViiV Healthcare division (which specialises in HIV drugs) to decide whether a spin-off would be beneficial to shareholders. While this now appears unlikely to happen, the fact that GlaxoSmithKline is focused on adding shareholder value bodes well for its medium to long term performance.
Clearly, it still has some way to go before its bottom line reflects its current strategy. For example, this year is set to be the fourth in a row of profit declines, with the company’s net profit due to fall by 21%. This, in itself, is not a major surprise: global pure play pharmaceutical companies on both sides of the Atlantic have endured a tough few years, with generic drugs taking away sales of treatments that have now lost patent protection.
However, with the aforementioned cost savings set to boost margins, next year should see GlaxoSmithKline make a comeback, with bottom line growth of 12% being forecast for 2016. Furthermore, GlaxoSmithKline continues to yield over 6%, making it one of the higher yielding stocks in the FTSE 100. And, with an excellent pipeline and sound strategy, it seems to be an excellent long term buy at the present time.
Also offering excellent future potential is Alliance Pharma (LSE: APH). It specialises in the purchase of off-patent drugs that continue to offer relatively appealing margins and this strategy looks set to deliver excellent results. For example, Alliance Pharma is due to record a rise in earnings of 7% next year and, while the company’s share price has soared by 47% since the turn of the year, Alliance Pharma still trades at a multiple of net assets of just 2.1. This indicates that there is plenty of scope for further rises in its valuation – especially with the company having remained profitable in the last five years, having a sound business model and an experienced management team.
Meanwhile, cattle breeding specialist, Genus (LSE: GNS), has posted a superb and relatively consistent share price performance in recent years. In fact, it is up 75% over the past five years, which equates to an annualised return of almost 12% per annum. However, while the company has a very appealing business model and is well-run, its share price rise may have fully factored in its future prospects.
That’s because it trades on a price to earnings (P/E) ratio of 23.2 and yet is forecast to record a rise in earnings of just 2% this year. As such, now may be the right time to watch Genus, but for investors seeking to find value within the healthcare space, GlaxoSmithKline and Alliance Pharma seem to be preferable choices.
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Peter Stephens owns shares of Alliance Pharma and 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.