Is Now The Perfect Time To Buy GlaxoSmithKline plc And AstraZeneca plc?

The world’s heavyweight pharmaceuticals companies have endured a tough three or four years. Expiring patents, competition from generics and constrained public healthcare spending have all taken a toll on sales and profits.

The UK’s FTSE 100 giants GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN) have been as badly affected as other big pharma groups. The table below shows three-year figures for Glaxo and Astra, and analyst forecasts for the current year and 2016.

 Year Glaxo revenue (£m) Glaxo core EPS (p) Glaxo core EPS growth (%) Astra revenue (£m) Astra core EPS (£m) Astra core EPS growth (%)
2012 26.4 107.4 -6 17.2 420.2 -15
2013 26.5 108.4 +1 15.6 306.2 -27
2014 23.0 95.4 -12 16.8 275.0 -10
2015 24.1 75.9 -20 15.8 275.2 0
2016 24.8 84.8 +12 15.3 265.2 -4

As you can see, while the two companies’ year-to-year earnings-per-share (EPS) movements aren’t an exact mirror of each other (different products, different patent expiry dates and so on), both have been — and are expected to continue — battling against falling earnings over the multi-year period.

The good news is that Glaxo’s earnings decline is expected to turn the corner in 2016, and Astra is tentatively poised for an upturn the following year. Despite both companies being closer to rejuvenation than they were a year ago, Glaxo’s shares have made no headway over the past 12 months, while Astra’s have fallen 6%.

Both companies have been restructuring and addressing costs And, with their re-focused businesses, continued R&D investment and new products coming through the pipeline, the next five years promise to be considerably better than the last five.

In third-quarter results this week, Glaxo reiterated its previous guidance on 2015 earnings expectations (“core EPS to decline at a high-teen rate”) and 2016 earnings (“core EPS percentage growth expected to reach double digits”), both at constant exchange rates (CER). In addition, the company reconfirmed its longer-term guidance: “core EPS expected to grow at CAGR of mid-to-high single digits over the five year period 2016-2020 on a CER basis”. So, things are looking good for the second half of the decade.

We won’t have third-quarter news from Astra until 5 November, but half-year results in July were promising. Revenue guidance for the full year was upgraded — “expected to decline by low single-digit percent (prior guidance — mid single-digit)” — with core EPS guidance maintained: “Expected to increase by low single-digit percent, reflecting the continued accelerated investment in R&D”. Astra hasn’t laid out longer-term guidance, like Glaxo, but has said it’s aiming to almost double revenue by 2023.

Earnings forecasts for 2016 put Glaxo on a price-to-earnings (P/E) ratio of 16.5, and Astra on 15.8. Those ratings look good value for two companies that are on the cusp of a sustained period of growth. Prospective dividend yields of 5.7% for Glaxo and 4.3% for Astra make for an added attraction.

Finally, I can tell you that Glaxo is one of just five stocks that have been identified as the very elite blue chips of the FTSE 100 in this FREE Motley Fool report.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca and 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.