GlaxoSmithKline Plc: Buy, Sell Or Hold?

The Motley Fool

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold... and those I feel you should sell!

I'm assessing every share on five different measures. Here's what I'm looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins;

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at GlaxoSmithKline

Today I'm evaluating GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), a British global pharmaceutical company, which currently trades at 1550p. Here are my thoughts:

1. Financial strength: The company is in solid financial health with net debt of only 2 times operating profits and interest obligations covered a comfortable 10 times. Also, the company is a cash machine and consistently converts 17% of revenues into free cash flow yearly. Over the past three years, free cash flow has averaged more than £4bn per year.

2. Profitability: In the last 10 years, revenues per share and earnings per share growth have barely outpaced inflation compounding by 4% and 3% per year, respectively, but dividends per share growth has been solid at 7% per year. Operating margins have been consistently around 30% while the 10-year average return on equity has been a remarkable 70% per year.

3. Management: Sir Andrew Witty succeeded Dr. Jean-Pierre Garnier as the company's CEO in May 2008. Under his leadership, the company has returned a total of £25bn to shareholders through dividends and share buybacks, improved R&D returns from 11% in 2010 to 12% in 2012, and generated cost-savings of £2.5bn annually.

4. Long-term prospects: GlaxoSmithKline is one of the largest pharmaceutical companies in the world with a market capitalisation of £76bn and annual revenues of £26bn. For the past five years, to mitigate the effects of the 'patent cliff' and global financial crisis, the company shifted its focus into higher growth areas biopharmaceuticals, vaccines, consumer healthcare and emerging markets while restructuring its US and European operations. Although, the US and Europe still account for the bulk of the company's revenues, at 32% and 28%, respectively, sales from Japan, Latin America and Asia-Pacific now account for 40% of the total group revenues. Furthermore, under its new operating model, R&D productivity and returns have improved -- the company is on target on achieving a 14% return on R&D by 2014 and has a total of 15 new vaccines and medicines it could potentially launch over the next three years.

5. Valuation: GlaxoSmithKline's shares are trading at a trailing price-to-earnings (P/E) ratio of 14, slightly above its 10-year P/E average of 13 and the sector P/E of 12.5. It also sports a current dividend yield of 5%, twice covered.

My verdict on GlaxoSmithKline

The last few years have been a challenging time for the pharmaceutical industry with the patent expiries and increasing healthcare regulation, austerity measures, and generic competition weighing down on revenues and profits. Despite weak trading results recently, the outlook for the company remains promising as demand for healthcare is only going to grow due to an ageing global population and the increasing wealth of developing nations. GlaxoSmithKline is well positioned to take advantage of these long-term demographic trends with its strong presence in emerging markets, a deep pipeline of products, a much improved R&D and cost-efficient operations.

So overall, I believe GlaxoSmithKline at 1,550p looks like a buy.

More FTSE opportunities

As well as GlaxoSmithKline, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor". This exclusive report reveals the favourite income stocks owned by Neil Woodford -- the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.