Why GlaxoSmithKline plc looks set to be beaten by Inmarsat Plc

I think there's better investment potential in the some of the smaller firms in the FTSE 100 than the 30 or so largest constituents of the index.

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With that in mind, I'm attracted to satellite communications service provider Inmarsat (LSE: ISAT), which could make a better long-term investment than pharmaceuticals giant GlaxoSmithKline (LSE: GSK).

David and Goliath

Although both firms reside in the FTSE 100 index, Inmarsat's £3,320m market capitalisation makes it a David compared to Goliath GlaxoSmithKline, which has a market cap of £69,375m.

Despite the size difference, the firms share defensive characteristics due to both operating in sectors capable of delivering steady inflows of cash.

It's all about cash from operations

The well-reported patent-cliff headaches of recent years have made it more difficult for GlaxoSmithKline to grow as lines with high earnings lost patent exclusivity and profits plunged. However, the firm seems to remain popular in many investors' and fund managers' income-focused portfolios despite a record of erratic outcomes for profit and cash flow:

Meanwhile, Inmarsat describes itself as the market leader in the provision of mobile satellite services, with the largest portfolio of global satellite communications solutions and value-added services on the market.

The firm uses its fleet of 12 satellites to provide communications services to organisations operating in hard-to-get-to places where terrestrial communications are unreliable or non-existent. It's a cash-generating business as the firm's record shows.

Inmarsat's profits receive strong support from cash flow.

Valuations

At today's share price of 735p, Inmarsat trades on a forward price-to-earnings (P/E) ratio of almost 20 for 2017. GlaxoSmithKline's forward P/E multiple runs at almost 16 for 2017. When it comes to dividends, the two firms are close with Inmarsat yielding a forward 5.3% and GlaxoSmithKline just over 5.6%. City analysts following the firms expect earnings to cover Inmarsat's payout almost once and GlaxoSmithKline's a little over once.

Both firms are coming through periods of contracting earnings and expect profits to rise going forward. Inmarsat sees earnings dropping by around 23% this year and rebounding by 12% during 2017. GlaxoSmithKline expects earnings to expand by 16% this year and by 5% during 2017.

Outlooks

In April's first-quarter results report, GlaxoSmithKline told us that a strong performance demonstrates momentum driven by growth in sales of new products, cost control and execution of restructuring and integration plans. The firm's new product development pipeline is also delivering encouraging results and Indeed, with earnings figures back in positive territory, it does seem as if GlaxoSmithKline is finally emerging from its dark tunnel.

Meanwhile, Inmarsat's Q1 report in May has it that the firm's near-term business growth will continue to be challenging but the medium-to-long-term outlook is positive.

Both firms are worth researching for their defensive characteristics but I favour Inmarsat, putting my faith in the company's recovery potential and strong-looking cash flow.

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Kevin Godbold has no position in any shares mentioned. 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.