The Motley Fool

Why I believe the GlaxoSmithKline share price is now too cheap to ignore

Image source: Getty Images.

It seems over the past year, the GlaxoSmithKline (LSE: GSK) share price has gone nowhere but down. For the year to March 21, the FTSE 100 declined 4.5% while shares in Glaxo dropped 23%, excluding dividends.

However, over the past few weeks, the stock has recovered some ground while the rest of the market has floundered. Year-to-date, shares in Glaxo are now up by 6.4%, excluding dividends, compared to the FTSE 100’s decline of 7.2%. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

And even after this mini-rally, I believe the GlaxoSmithKline share price is too low to ignore.

The sector’s cheapest 

A quick glance at Glaxo’s valuation metrics tells you a lot about this company. The stock is currently trading at a forward P/E ratio of just 12.8 and supports a dividend yield of 5.8%. Compared to its larger US peers such as Johnson & Johnson, Merck & Co Inc, Bristol-Myers Squibb Co and Eli Lilly and Co, which together trade at an average forward P/E of 15.7, Glaxo looks undervalued by around 19%. 

On an enterprise value to earnings, before interest tax depreciation and amortisation basis (EV/EBITDA) which factors in a company’s debt in the evaluation process, Glaxo is trading at an EV/EBITDA ratio of 10.3, compared to the sector average of 15.3.

Put simply, it shows that Glaxo is drastically undervalued compared to its peers.

What’s behind the valuation gap? 

The reason why the company is trading at this level is not so easy to explain. The stock has come under pressure partly due to worries that it may cut its dividend to fund acquisitions, and partly due to investors’ concerns that Glaxo’s growth outlook is limited.

The first of these two overhangs was laid to rest (for the time being at least) when Glaxo announced that it was pulling out of the race to buy Pfizer’s consumer healthcare unit in March. A short time after this announcement, the company announced that it had agreed to buy Novartis’s 36.5% stake in their consumer healthcare joint venture for $13bn in cash. Management believes the deal will boost earnings by about 5% in 2019 and could add even more going forward. 

What’s more, by merging the business into its existing consumer arm, management believes it can push operating margins from 17.7% to the mid-20s by 2022. 

Even though this deal means Glaxo’s debt will rise to 2.5 times operating earnings, according to City analysts, it’s unlikely to jeopardise the dividend payout. And the sale of non-core consumer nutrition products, worth an estimated £2.5bn, can alleviate any immediate pressure on the dividend. 

Too cheap to pass up? 

So, for the time being, it looks as if Glaxo’s dividend is safe. It also seems as if the company’s growth is also set to receive a boost from the above deal. In other words, I believe that the deal with Novartis has offset the primary concerns hanging over the shares.

With this being the case, and considering the firm’s deep discount to the rest of the sector, I believe the GlaxoSmithKline share price is now too cheap to ignore.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.