Strong sales growth and reduced costs boost GlaxoSmithKline plc's results

GlaxoSmithKline GSK head office

Shares in GlaxoSmithKline (LSE: GSK) were given a boost today with the healthcare company releasing a positive set of results for the first quarter of the year.

Sales increased by 8% at constant exchange rates to £6.2bn, with the company's vaccines division, in particular, reporting strong performance. GlaxoSmithKline's new product sales increased from £269m in the first quarter of last year to £821m this year, and they now represent 20% of total pharmaceutical sales, being driven higher by HIV, respiratory and meningitis vaccines.

Moving in the right direction

Alongside increasing sales, GlaxoSmithKline is also making excellent progress on its cost reduction strategy. Its restructuring and integration programme delivered incremental cost savings in the first quarter of £0.4bn, with the company continuing to be on-track to record £3bn annual cost savings by the end of 2017. And with improved operating leverage and margin delivery across all three of the company's main businesses (pharmaceuticals, vaccines and consumer healthcare), it seems to be moving in the right direction.

As a result of rising sales and falling costs, GlaxoSmithKline's first quarter core earnings per share have risen by 8% at constant currency. Although the reported figure is down from the comparable period of last year, it included a £9.3bn profit from the oncology disposal which was a one-off item. As such, the core figure is more relevant and on this front, GlaxoSmithKline is performing well.

Looking ahead, GlaxoSmithKline expects to report core earnings growth of between 10% and 12% for the full year. If this is met, investor sentiment in the company could improve and push its share price higher since such a rate of growth is well ahead of that of the wider market. And with GlaxoSmithKline confirming dividends per share of 80p in the current year and next year, its yield of 5.4% is likely to remain popular and encourage demand to rise for its shares over the medium term.

A worthy purchase

GlaxoSmithKline seems to have excellent momentum in all three of its businesses and it appears to be capable of sustaining the strong performance that it has delivered of late. With its shares trading on a price to earnings growth (PEG) ratio of only 1.2, it seems to offer a wide margin of safety in case earnings forecasts are downgraded. And with its risk/reward ratio being very favourable, it seems to be a worthy purchase at the present time.

This view is backed up by GlaxoSmithKline's product pipeline of around 40 treatments which have the potential to further enhance its sales and profitability in the long run. With such a diversified pipeline, GlaxoSmithKline offers not only strong growth potential, but also reduced risk. As such, and while its sales growth stalled somewhat in recent years, GlaxoSmithKline seems to be back on track and with room to deliver further improvements to its financial performance in 2016 and beyond.

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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.

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