Why GlaxoSmithKline Is Heading To $60

Apr.29.14 | About: GlaxoSmithKline (GSK)

Summary

Despite recent negative publicity, investors have several reasons to be encouraged about the company's future.

While I'm not ready to say Glaxo will operate risk-free, there's nothing left in this story to suggest that these shares are any riskier than they were before.

With Glaxo shares trading at around $56, the stock looks set to reach $60 to $65 in the next 6 to 12 months on the basis of long-term revenue growth.

When compared to other Big Pharma names like Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ), GlaxoSmithKline (NYSE:GSK), whose stock is up just 6% year-to-date, has been a relative underperformer. But that, in and of itself, should be considered a "win."

While Glaxo has gone relatively unscathed following a flurry of news related to a bribery scandal in China, investors have grown concerned about pricing developments in Europe. Despite all of this, with the company having delivered consecutive quarters of strong earnings growth, investors have several reasons to be encouraged about the company's future.

Not only has management promised a billion-pound cost-cutting program, Glaxo is ready to launch several new products, which industry experts have described as having "high potential." To what extent these products can contribute to Glaxo's long-term revenue growth remains to be seen. And at the very least, the cost-cutting program should had a boost to the company's bottom line.

But suffice it to say, now is not the time to be down on this company. If one, or even two of these scenarios pan out, concerns about pricing pressure will be a thing of the past. To that end, while I'm not ready to say Glaxo will operate un-threatened by Johnson & Johnson and Merck, there's nothing left in this story to suggest that these shares are any riskier now than before.

Glaxo will report first-quarter results Wednesday. Although estimates have been lowered over the past three months, analysts seem broadly optimistic about ahead of the results, given the slew of earnings beats we've seen so far in this sector.

The Street will be looking for 72 cents in earnings per share, which will reflect a 12% year-over-year decline. Last year, the company posted earnings per share of 82 cents. For the fiscal year, analysts are projecting earnings of $3.59 per share. But as noted, despite recent hiccups in operations and some negative press, Glaxo has been profitable eight consecutive quarters. This should not be taken lightly.

During that span, management has grown the company's profits by an average of 30% in the last four quarters. So the expected profit decline on Wednesday is completely out of the ordinary. And much of that decline has to do with the adjustments of Glaxo having sold its oncology assets to Novartis (NYSE:NOV), a deal that estimated to be worth $16 billion.

In terms of revenue, analysts will be looking for $9.84 billion, which will be flat on a year-over-year basis. For the fiscal year, revenue is projected to come in at $42.08 billion, which will be roughly 2% higher year-over-year. Last year, Glaxo posted revenue of $41.43 billion. Here, too, revenue doesn't seem impressive. But that's not what is going to move this stock.

What will matter most on Wednesday is what management says about the company's improving product pipeline, and to what extent the company guidance presumes modest to better-than-expected growth. Note, earnings are projected to decline this quarter, and revenue is projected to be flat. This tells me that the Street already appreciates the company's situation with respect to its restructuring measures.

Last but not least, any updates to the company's new cancer drugs and treatments for HIV and lung disease, which have received regulatory approval, can send this stock soaring. Management must do a good job selling their potential. With Glaxo shares trading at around $56, investors can expect the stock to reach $60 to $65 in the next 6 to 12 months on the basis of long-term revenue growth and an underrated drug pipeline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's healthcare sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.