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Is the GSK share price the biggest value trap in the FTSE 100?

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GlaxoSmithKline (LSE: GSK) shareholders have been well rewarded over the past year. Including distributions to investors, the stock is up 13% over the past 12 months and by nearly a third over the past 15 months. That’s compared to a gain of just 5% for the FTSE 100.

The big question: Is this performance sustainable, or is the stock set for a substantial near-term decline?

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Improving outlook

I believe the primary reason why the GSK share price has outperformed over the past 12 months is thanks to the actions taken by its new CEO, Emma Walmsley.

After taking over the business last year, Walmsley hasn’t been idle. She’s negotiated a massive deal to merge the company’s consumer healthcare business with Pfizer and inked two multi-billion dollar oncology deals. These include GSK’s $5.1bn acquisition of Tesaro and its pipeline of cancer treatments, as well as a $4.2bn payout to Merck.

These deals attracted some criticism at the time, but they’re already starting to pay off. Last week, GSK announced Zejula, a drug acquired in the Tesaro deal, has demonstrated its effectiveness in stopping the spread of ovarian cancer when taken after a patient has undergone chemotherapy.

Tests have also revealed the treatment could potentially have an even bigger market than initially expected as Zejula also proved to be effective regardless of whether cancer patients possessed a particular genetic mutation. This is excellent news for both GSK and ovarian cancer patients.

Consumer healthcare 

As well as boosting the company’s oncology business, Walmsley is also presiding over the merger of GSK and Pfizer’s consumer health businesses. When complete, the joint venture will have combined sales of approximately £9.8bn.

GSK will have a majority controlling equity interest of 68% and Pfizer will have an equity interest of 32%. There’s mounting speculation the partners will spin off the joint venture into an independent business when the merger is complete. This could unlock billions of dollars in value from the GSK share price.

GSK’s seems to be firing on all cylinders, and City analysts are expecting the company to report strong earnings growth this year. They’ve pencilled in earnings per share growth of 24% for the year, which puts the stock on a forward P/E of 14.9.

This may look expensive, but it’s in line with the GSK’s international peers, which are trading at a multiple of around 14.3 times forward earnings. The stock also supports a dividend yield of 4.8%.

The bottom line

So overall, even those shares in GSK have smashed the broader market over the past 15 months, it doesn’t look as if the stock is overvalued at current levels. Management’s growth initiatives are starting to pay off, and the joint venture with Pfizer could be a massive catalyst for the stock at some point during the next few years.

Considering all of the above, I think the shares still look attractive as an investment at current levels and could continue to outperform if GSK’s pipeline continues to generate results.

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Rupert Hargreaves owns no share mentioned. 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.

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