Pharma giant Glaxosmithkline (NYSE:GSK) has caught my eye and I added it to my research list with the intention of taking a closer look in coming days. GSK may have left you with a sour taste--it recently reached a new 52 week low after free falling about $9 from its 52 week high. The company has also been in the news with questions surrounding its diabetes drug Avandia. To top it all off, there's that awful name: Glaxosmithkline. Let's hope they don't merge with Bristol Myers Squibb.
Why would I be interested in a company that's down and out? Exactly because it's down and out. The best way I know of getting to own outstanding businesses for cheap prices is by buying them when they're scratched. The challenge of course is to figure out whether the problems are temporary or here to stay.
Aside from a price drop and negative publicity, what attracted my attention to GSK are some of its numbers. It has a trailing P/E ratio of 13.6 and a forward P/E ratio of 12.3. That's substantially cheaper than the market (21.2), cheaper than GSK's historical valuation (5 year average P/E of 17.4), and cheaper than other large cap pharma stocks (26.4).
Despite a low P/E, Glaxo has historically earned very high returns on assets (21%) and equity (67%), and very high operating (34%) and net (24%) margins. Those are fantastic numbers for any industry--even when compared to amazingly profitable pharma comps. Relative to peers, GSK also has a diversified portfolio of drugs and a robust pipeline, offering it some insulation from generic competition.
A generous 3.7% dividend yield means that I would get paid to wait for GSK to recover. But will it recover? Is the recent price drop an overreaction or a hint of more to come? I don't have an answer to that question yet, but hope to come to a clearer opinion as I continue my research.
Data sources: Morningstar, Yahoo Finance