Is it time to take profits on GlaxoSmithKline plc and AstraZeneca plc?

Since Brexit, the FTSE 100 has been on a staggering run gaining 10.8% as sterling has slumped. This sterling weakness has helped make the index more attractive to overseas buyers and pushed up the earnings of those companies that have operations overseas but report profits in GBP.

AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK) are two companies that have benefitted from this trend. Indeed, since Brexit shares in Astra have gained a staggering 32% and Glaxo’s shares have gained 19.4%, both outperforming the wider FTSE 100 by a wide margin.

But is it time to sell? Recent gains have taken the share price of Astra to a multi-year high despite the company’s deteriorating operating performance. It’s still unclear how Astra will fare after 2016 as the company loses the exclusive manufacturing rights to its blockbuster Crestor treatment.

A Crestor cliff

Crestor was Astra’s best-selling drug, raking in more than $4bn per annum for the group at its peak. However, this year the substance patent for it expires, which means that Astra loses the exclusive manufacturing rights to the product. The patent was set to expire at the beginning of January, but AstraZeneca won a six-month extension under the US paediatric trials incentive programme. The extension officially expired on 8 July, a week after the end of Astra’s Q2.

For the first half of 2016 Astra reported a 17% decline in core operating profit and a 22% decline in core earnings per share and it’s likely these declines will only accelerate as Crestor comes off patent. The company has been trying to replace its revenue with new treatments, but these have been slow to come to market.

Still, Astra should receive a boost from sterling’s devaluation. Within the company’s first-half results release, management stated: “Core EPS is now expected to benefit from currency movements by a low to mid-single-digit percentage versus the prior year.” Although it remains to be seen if this currency boost will be enough to offset the revenue losses from Crestor coming off patent. 

City analysts expect Astra to report a 7% decline in EPS for 2016. Based on these forecasts the company is trading at a forward P/E of 16.6 and the shares support a dividend yield of 4.1%.

A better pick

Astra struggles but Glaxo seems to be charging ahead as the company’s multi-year transformation plan starts to pay off. 

At the end of July, it reported core sterling EPS growth of 28% for the first half of 2016, with core sterling operating profit up a staggering 36% year-on-year for Q2. Sales increased across all of the company’s reported business divisions with group sales for the period growing by 4% at constant exchange rates to £6.5bn. Sterling’s devaluation is responsible for most of this growth. Within Glaxo’s first-half results release management noted that the estimated impact of post-Brexit sterling weakness is a 19% boost to core EPS. 

Nonetheless, underlying revenue growth for the first half shows that Glaxo is making steady progress in growing sales and isn’t just relying on accounting treatments to boost income.

Analysts expect Glaxo to report EPS growth of 27% for 2016. Based on these forecasts the company trades at a forward P/E of 17.4 and the shares support a dividend yield of 4.9%.

In my opinion, based on Glaxo and Astra’s current growth outlook, it looks as if it might make sense to consider booking profits in Astra but holding on to Glaxo. 

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.