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Is the worst over for GlaxoSmithKline shares?

Image: GlaxoSmithKline

There is something counterintuitive about the share price chart of FTSE 100 pharmaceuticals biggie GlaxoSmithKline (LSE: GSK). In the past few months it has been edging up, after disappointing its holders in 2020. I would have expected the opposite to be the case. 

2020 saw some very nervous investor behaviour, that among other things, showed up in an interest in traditional defensives. These are companies that see limited demand declines in bad times, which makes them far more attractive during uncertain periods. In line with this, I would have expected to see that reflected in GlaxoSmithKline’s price trends too. Instead, GSK dropped through much of 2020 and continued the trend into this year. By February, it had dropped to multi-year lows. 

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Why has the GlaxoSmithKline share price dropped so low?

February’s lows were explained by the company’s decision to cut dividends. This followed weak results for the company. The pandemic impacted its revenues, as demand for less urgent healthcare was postponed. The company also expects earnings per share to decline. And its attempts at developing a Covid-19 vaccine along with France’s Sanofi have been delayed. They are still in process, but much of the initial vaccination drive could be completed by the time that a vaccine is released. 

This is clearly a fair bit of bad luck for GlaxoSmithKline when the company is already going through deep structural changes. Its pharmaceuticals and consumer healthcare divisions are set to be split into two separate parts by 2022. 

Good things are coming

But I am not giving up on the stock. Not yet, especially since its share price has been rising steadily since it hit rock bottom in February. It is up 18% since then. But I think it can gain far more from here. 

It is still a profitable company. Even with a decline in profits, it should be in a fairly strong position compared to many other FTSE 100 stocks that have been battered by the pandemic. Compared to many such cyclical stocks, including travel and retail ones, its share price has risen much less. 

Also, it has made progress with the development of its Covid-19 vaccine. It recently said that the vaccine candidate is now in its third phase of clinical studies. Moreover, its revenue growth could improve this year as more people are vaccinated, there are fewer restrictions on movement and non-Covid-19 healthcare can be handled faster. 

Yet the shares are still trading at really cheap valuations. GSK’s price-to-earnings (P/E) ratio is 13.4 times, which is way lower than many FTSE 100 companies. For instance, its peer AstraZeneca trades at 38 times. 

Would I buy?

Buying GlaxoSmithKline shares is not without its risks, quite clearly. If I had invested in the stock this time last year, I would have lost 17% of my capital. By contrast, the FTSE 100 index has risen more than 13% since then. But there is also plenty of opportunity in the stock right now because it has fallen so low. I would buy it now. 

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Manika Premsingh owns shares of AstraZeneca. The Motley Fool UK 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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