Why I'm bullish on GlaxoSmithKline plc for 2017
I believe GlaxoSmithKline(LSE: GSK) is one of the market's most undervalued and under-appreciated stocks. Over the past year, the company has gone from a business struggling to grow, to projected earnings per share growth of 30% this year and 10% for 2017. If Glaxo hits these growth targets, the firm's earnings per share will hit a level not seen since 2012.
However, despite this projected growth, shares in Glaxo are only trading at a forward P/E multiple of 15.1, falling to 13.8 for 2017. When you consider the fact that shares in other highly defensive companies such as Unilever and Reckitt Benckiser are trading at forward price-to-earnings multiples of around 20, Glaxo's shares look severely undervalued.
On top of Glaxo's depressed valuation, the shares also support a dividend yield of 5.2%, compared to the market average of around 3%. Over the past few years, City analysts have expressed caution about the sustainability of Glaxo's dividend payout as earnings per share have declined and the company's dividend cover slipped below one. But now the 80p per share payout is covered by earnings, allaying any payout concerns.
This year City forecasts suggest the payout will be covered 1.2 times by earnings per share and next year the payout cover is projected to rise to 1.4.
On the face of it, Glaxo's shares look like a steal, but there's a reason why the shares have lost nearly 10% of their value over the past three months.
The market is worried about the pharmaceutical sector's growth prospects. Drug pricing was a hot issue in the US election, and now there's growing concern that regulators will act to control drug prices.
For some companies, a move to control drug prices will be devastating as this has been a key revenue driver over the past few years. For Glaxo this won't be such an issue. The company is growing organically as its pipeline of treatments under development begins to yield results. What's more, the group's consumer healthcare division provides a stream of predictable income for Glaxo, which will grow slowly-but-steadily as the world's population expands.
In a nutshell, while there are concerns surrounding Glaxo's growth outlook, the company is proving doubters wrong. Even though earnings have received a boost from the devaluation of sterling since Brexit, at constant exchange rates Glaxo's sales expanded 7% for the nine months to the end of September and operating profit grew 14% as new products hit the market.
So overall, shares in Glaxo are cheap relative to the company's projected growth and offer a market-beating dividend yield. Further, while there have been some concerns about Glaxo's outlook, the company is still pushing ahead and organic growth looks set to continue for some time. As the company allays concerns about its growth outlook over the next 12 months, the market should begin to give Glaxo the valuation it deserves.
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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.