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Summary

  • Despite the downbeat revenue numbers, Glaxo still posted 70 cents in earnings per share.
  • Not only has management begun to execute its billion-pound cost-cutting program, Glaxo is ready to launch several new products, which industry experts have described as having "high potential."
  • With Glaxo shares trading at around $55, following the recent dip, I'm maintaining my prior target of $60 to $65 in the next 6 to 12 months.

Last week, I offered several reasons why I believed GlaxoSmithKline (NYSE:GSK) was heading to $60. The two main reasons for my bullishness included an improved pipeline and advancements in the company's new cancer drugs, which have received regulatory approval.

Plus, when you factor in Glaxo's progress in treating HIV and lung disease, I didn't buy into the notion that Glaxo, whose stock was up just 6% year date, would underperform Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) for very long. And following the company's first-quarter earnings results, this sentiment has not changed, despite the slight dip in revenue, which sent the stock down roughly 2% on the announcement.

First-quarter revenue was down 2% year-over-year to $9.3 billion. Revenue was adversely impacted due to currency exchange rates [CER]. Investors were spooked by the revenue miss. Recall, analysts were looking for $9.84 billion, or flat year-over-year revenue. But revenue has never been the moving factor of this stock. And when looking deeper into the numbers, things weren't as bad as initially believed.

Consider, on a segmental basis, which included the two primary businesses of Pharmaceuticals and Vaccines/Consumer Healthcare, Glaxo actually performed better-than-expected, in most cases. Revenue in Pharmaceuticals/Vaccines were down 3% year-over-year and Consumer Healthcare revenues were flat. But Vaccines grew 3% due to strong performance in Europe. And this is where I've become even more impressed.

Recall, ahead of the report, investors were concerned about the flurry of news related to a bribery scandal in China and adverse pricing developments in Europe. Despite all of this, Glaxo had been relatively unscathed, delivering consecutive quarters of strong earnings growth. There was the belief, however, that this quarter was going to reveal the worst. But that wasn't the case.

In fact, that entire segment posted growth in areas like Japan and Emerging Markets, which were up 3% and 2%, respectively. So I have to consider this a victory. And investors have several reasons to be encouraged about the company's future. But it wasn't all good news.

The struggles continue in the U.S., which has been an issue for some time. Competition with Glaxo's top-selling asthma drug Advair has begun to eat into Glaxo's market share. U.S. retailers have had no choice but to de-stock Advair in favor of cheaper alternatives, which impacted Glaxo's U.S. revenue by 10%, leading to a 4% year-over-year decline in the Pharmaceuticals segment.

Despite the downbeat revenue numbers, Glaxo still posted 70 cents in earnings per share. Although this is down on a year-over-year basis, the 70 cents was up 2% on a CER basis and enough to beat consensus estimates. The company continues to benefit from its ongoing restructuring and cost-control initiatives.

Not only has management begun to execute its 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 continue boosting the company's bottom line in the long-term.

Management also added some color to the company's recent asset-swapping deal with Swiss company Novartis (NYSE:NOV). Glaxo will sell its oncology division, while gaining Novartis' vaccines business, which I believe will enhance Glaxo's long-term earnings outlook. The company also announced that during the quarter, it bought back shares worth £28 million. And share repurchases in 2014 are expected in the range of £1-£2 billion.

What's more, when you consider that the company increased the dividend by approximately 6%, now is not the time to be down on Glaxo. Management has done a better-than-expected job of managing the company's pipeline and withstanding the onslaught of generic attacks. To that end, concerns about pricing pressure have been exaggerated, and there's nothing left in this story to suggest that these shares are any riskier now than before.

With Glaxo shares trading at around $55, following the recent dip, I'm maintaining my prior target of $60 to $65 in the next 6 to 12 months on the basis of long-term revenue growth, margin expansion and an improved portfolio of drugs.

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.

Source: Investors Missed The Good In GlaxoSmithKline's Results