For most of the past year, any examination of the Pharmaceutical industry begins and ends with COVID-19 vaccines. Literally, of course, this isn’t true; diseases of all kinds don’t take a holiday during a pandemic, and so development of existing projects for any company in this industry hasn’t stopped, either. Nonetheless, the massive, immediate impact of COVID has disrupted the industry as governments around the world have, not surprisingly prioritized COVID vaccines over other projects already in development.
While there are already a couple of vaccines being administered, there are a lot of other companies that are also in their own late stage trials that aren’t getting talked about as much. One is British pharma giant GlaxoSmithKline PLC (GSK), who is working with multiple companies to combine their vaccine candidates with GSK’s adjuvant technology. An adjuvant can be thought of as a booster, as it can be used to enhance immune response, increasing both the strength and longevity of immunity versus the vaccine alone. It also enables higher production with less ingredients, enabling manufacturing at scale. Two of these vaccine candidates are entering late-stage trials.
For GSK, these projects are interesting, and certainly helps to call attention to their efforts to help combat the spread of the virus on a global basis; what remains to be seen, however is how much they will benefit the company’s bottom line. Previous statements from GSK’s management team make it clear the company is not expecting to profit from any COVID-19 vaccine as long as the pandemic persists; in fact, any short-term profit they may realize is planned to be invested in further coronavirus-related research and long-term pandemic preparedness. The company most recent earnings statement also included the disclosure that GSK was discontinue collaboration on one COVID project with Clover Biopharmaceuticals. While with earnings and revenues beat expectations, that news, along with a 2021 outlook that didn’t meet expectations has added to pressure on the stock.
From my perspective as a value-oriented investor, COVID vaccine development is most useful simply because it gave me a reason to take a deeper look into GSK’s fundamental and value profile. This is a company with a broad, global product portfolio, with a number of over-the-counter brands that you and I are likely to recognize during a typical run through the grocery store. That means that, pandemic aside, the company is already well-positioned to benefit in the broadest sense from increased public awareness about health in general. In fact, the numbers reported by management during the pandemic have been encouraging; while it isn’t surprising that recessionary global conditions have led to declines in revenues and Net Income in the last quarter, other important measurements, including Free Cash Flow, have been stable, pointing to a management team that is putting a lot of attention on managing costs and maximizing operations.
Technically speaking, the stock has been dropping since just before the last earnings announcement on February 3, dropping below a consolidation range between $37 at support and $39 at resistance post-report to a low at the end of last week at around $35. That puts the stock within just a few dollars of its bear market low in March of last year, with a long-term downward trend working against it. Are the fundamentals strong enough to support a useful long-term value proposition, or is GSK a stock that value investors should stay away from right now? Let’s dig in to find out.
Fundamental and Value Profile
GlaxoSmithKline PLC is a global healthcare company. The Company operates through two segments: Pharmaceuticals and Vaccines. The Company focuses on its research across six areas: Respiratory diseases, human immunodeficiency virus (HIV)/infectious diseases, Vaccines, Immuno-inflammation, Oncology and Rare diseases. The Company makes a range of prescription medicines and vaccines products. The Pharmaceuticals business discovers, develops and commercializes medicines to treat a range of acute and chronic diseases. The Vaccines business provides vaccines for people of all ages from babies and adolescents to adults and older people. It has a portfolio of medicines in respiratory and HIV. Its Pharmaceuticals business includes Respiratory, HIV, Specialty products, and Classic and Established products. Its Vaccines business has a portfolio of over 40 pediatric, adolescent, adult, older people and travel vaccines. GSK has a current market cap of $89 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by a little more than -3%, while sales were flat, but positive by 0.71%. In the last quarter, earnings declined -32.6%while Revenues improved about 3.4%. GSK’s Net Income versus Revenue is healthy, with signs of pressure in the last quarter; over the last twelve months, Net Income was 16.71% of Revenues and weakened in the last quarter to 7.75%. This is a concern, but also not especially surprising given the restrictions in place due to COVID on all types of operations and the increased level of prioritization of COVID vaccines over others under current conditions.
Free Cash Flow: GSK’s Free Cash Flow remains healthy, at more than $9.35 billion. This does mark a decline from the middle of 2020, when Free Cash Flow was $10.77 billion, but is also above the company’s pre-pandemic level; Free Cash Flow was $9.15 billion in January 2020. The current number also translates to a Free Cash Flow Yield of 10.53%.
Debt to Equity: GSK has a debt/equity ratio of 1.13, which is generally high, but also not unusual for companies in the Pharmaceutical industry.. Their balance sheet shows a little over $8.3 (up from $7.8 billion at the beginning of 2020) in cash and liquid assets against a little less than $30.1 billion in long-term debt. Servicing their debt is not a concern.
Dividend: GSK pays an annual dividend of $2.68 per share, which at its current price translates to an impressive yield of 7.6%. It is also noteworthy that the dividend was increased on an annualized basis from $2.50 per share in the quarter prior.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $60 per share. That means that GSK is significantly undervalued, with about 70% upside from its current price.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line defines the stock’s downward trend from a high a year ago at around $44 to is bear market low around $31.50 in March. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After rallying to about $43 by mid-April, the stock began to drift mostly sideways, following a gradual downward trend that saw the stock establish a narrow trading range that was broken in August when the stock fell through support around $39 to retest those March lows at the beginning of November at around $33. The stock temporarily touched the 61.8% retracement line at around $39 before dropping back again to find support in late December at the 38.2% retracement line at around $36. That prompted a new push to about $39 prior to the last earnings report, with the stock having now broken $36 support (which now marks immediate resistance) and appearing to find new support at around $35. A push back above $36 could give the stock room to push to about $38 before finding next resistance, while a drop below $35 could see the stock fall to about $33 per share to next support, or possibly to text bear market support at around $31 if bearish momentum remains accelerated.
Near-term Keys: GSK’s balance sheet strength is giving the company the resources it needs to keep pushing forward even while other pressures are in place on Revenue and Net Income. The company’s ability to maintain healthy Free Cash Flow and even increase its dividend is a sign of strength, and the fact that the stock is trading at a significant discount is also a very positive sign that could make the stock one to watch and to take seriously as a useful, long-term value opportunity. If you prefer to work with short-term trading strategies, you could use a break above $36 as a signal to buy the stock or work with call options, using $38 as a useful bullish profit target. If the stock falls below $35, you could also consider shorting the stock or buying put options, using $33 as a practical bearish profit target.
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