GlaxoSmithKline: To Buy Or Not To Buy?

| About: GlaxoSmithKline (GSK)


GSK is trading at nearly 15% discount to previous valuations.

Ebola vaccine entering Phase I clinical trials, potential 2015 release date.

The combination of a discount and a high-profile product could lead to future upside for buyers.

GlaxoSmithKline (NYSE:GSK) is a global pharmaceutical company known for producing a variety of drugs and consumer goods such as AquaFresh toothpaste, Tums gastrointestinal aid, and Amoxil (amoxicillin) antibiotic. The reasons for the drop in share price could be attributed to a couple of events. GSK Q2 2014 results of $9.3 billion revenues, although comparable to the $9.3 billion revenue Q1 2014 results, is a 7% decline from Q2 2013 results of $10.4 billion. A drop in quarterly year over revenues combined with an uncertain climate in Eastern Europe likely contributed to the drop in stock price.

GSK is not only affected by the economic climate, but is also affected by other world affairs. GSK is dealing with investigations in China over alleged bribery of doctors by GSK China to prescribe GSK products to patients. The Chinese government has cracked down on this behavior in an effort to reduce corruption within their nation, and the situation has caused some investors to sell shares of GSK. If the charges are found to be accurate, GSK would be discredited in China and lose an important part of its customer base in the second-largest economy in the world. Nearly 41% of the $26.5 billion in 2013 revenues came from Russia, China, Brazil, India, Australia, and Canada combined. Assuming sales were proportional to GDP, China would account for 48.9% of that 41% with the world's second-largest GDP of $9.2 trillion. Losing China as a customer base could mean a loss of up to 20% of GSK revenues, $5.3 billion from 2013 revenues. Were GSK to lose such a potentially large portion of revenues, GSK would have to fight for larger market share in the US economy of $17 trillion. However, the company claims to be taking the proper steps to investigate and punish if need be the individuals responsible. Potential investors should be wary of the situation, but the drop in price from the negative publicity could also be used as a good buying opportunity.

The recent decrease in stock price could be a short-term event, seeing as how the GSK trailing P/E is 12.9, compared to the average trailing P/E of 25 for the overall drug industry. Additionally GSK reported 40 new drug compounds in Phase II/III trial development, as well as a high profile Ebola virus vaccine potentially entering Phase I trials this year. Pharmaceutical revenues brought in 67% of GSK 2013 revenues, nearly $18 billion. Results from Eperzan (type 2 diabetes drug) and Tivicay (HIV infection drug) have already been approved of this year or received positive opinion for market authorization. Since launching, Tivicay has already garnered 11% of the $20 billion global HIV drug market. Similar success with Eperzan would help capture some of the nearly $60 billion global diabetes treatment market, with just 2% market share bringing in $1.2 billion. Capture of 5% and up of the global diabetes market could even bring in enough to offset the potential loss of the Chinese market. Current P/E ratios and robust product development might indicate that GSK will rebound in the near term, good for investors who purchased at a discount.

Investing in GSK could also be a poor decision. Failure of clinical trials to produce good results combined with another quarterly earnings decline could send the stock price even lower. Due to the recent decline in price, GSK gives a 5.5% dividend yield, which appears significantly higher than the 5% that GSK has yielded for the past 3 years. The management could potentially lower the payout, which might further decrease the share price. Additionally, GSK finished 2013 with $21.2 billion in debt, albeit a reduction from $23.5 billion in 2012. Potential investors should watch GSK over the next quarter, being wary of a Q3 earnings decline, and watch disclosed clinical trial information. A Q3 earnings beat will likely signal an improvement of the business and result in a share price rebound.

A long stock investor should view the reduction in GSK stock price as a temporary decline and subsequent buying opportunity. Product development appears to be leading to greater revenue growth, even enough to offset the potential loss of a large customer base. Furthermore, the reduction in debt points to an improving balance sheet. The discount plus a dividend that has held steady at 5% for the past 3 years, and if the dividend is not cut significantly, provides a good basis for both growth and continuing income.

Disclosure: The author is long GSK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.