Reporting a 56% rise in sales for the first half of a financial year is a stunning performance by any investor’s standards. Of course, the pharma stock in question was aided by weak sterling, which added 22% of those gains. But even with positive currency translation excluded, a 34% rise in sales remains a stunning result. Could it even be sufficient to make it a more enticing purchase than GlaxoSmithKline (LSE: GSK) for the long term?
The pharma stock discussed is of course Dechra Pharmaceuticals (LSE: DPH). Its acquisitions made a significant impact on the top line, meaning that without their contribution its sales growth was 7%. Particularly strong performance was achieved in North America, where sales grew by 10%, while in Europe growth of 6% was recorded. Furthermore, all acquisitions are performing well and they have the potential to contribute even more growth to the company’s top line.
Clearly, Dechra’s results have been positively impacted by the effect of weaker sterling. This trend could continue over the coming months since the uncertainty created by Brexit may cause confidence in the UK economy to come under pressure. Therefore, the company could continue to deliver relatively high growth numbers, which may boost its share price. Today, for example, its shares are up by as much as 4%.
A bright outlook
Dechra’s outlook is positive, with the company expected to record a rise in its bottom line of 25% this year, followed by further growth of 23% next year. This puts it on a price-to-earnings growth (PEG) ratio of 0.9, which indicates that further capital gains are on the horizon.
However, it’s not the only pharma stock to benefit from weaker sterling. GlaxoSmithKline should also see its performance improve thanks to a weaker pound, with it forecast to record a rise in its bottom line of 10% in the current year. While this is lower than its sector peer’s growth rate and GlaxoSmithKline’s PEG ratio is higher at 1.4, its lower risk profile could make it the better option for the long term.
While Dechra has an excellent pipeline of potential new treatments, it lacks the diversity and strength of its rival. GlaxoSmithKline has a varied business model, which includes notable opportunities within its ViiV Healthcare division for example, while its consumer goods division provides ballast should patent expiry cause a fall in earnings from the pharmaceutical division. Consumer goods also ensures a degree of stability few companies within the healthcare sector are able to match.
As such, GlaxoSmithKline may be more expensive and lack the level of growth opportunity provided by Dechra. However, its greater diversity and more stable operating model mean that it has more appeal for long-term investors. Therefore, it continues to be the better buy despite today’s stunning results for its sector peer.
Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and 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.