For most of the past two years, any examination of the Pharmaceutical industry has necessarily begun and ended with COVID-19 vaccines. Literally, of course, this isn’t true; diseases and viruses 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 global impact of COVID disrupted the industry, social life, and business as we know it. Two years later, vaccines are readily available, but the long-term impact of COVID remains a question even as experts, and to be sure, the rest of us are anxious to look ahead to an endemic-phase shift in activity, rules, and guidelines.
In the U.S., most of the attention about the companies at the forefront of the race to development, distribute and administer vaccines was focused on companies like Pfizer, (PFE), Moderna (MRNA), and Johnson & Johnson (JNJ).
If you consider the global need for vaccines, it’s easy to understand that having a just a few available if insufficient, which is why global pharma companies are also worth paying attention to. One is British pharma giant GlaxoSmithKline PLC (GSK), who worked 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. Their efforts have produced both a vaccine and an antibody treatment, which combined have lifted the company’s sales over the past year.
From my perspective as a value-oriented investor, COVID vaccine development has been 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. Another interesting element to their current corporate structure are plans they announced to separate the company based on its Biopharma business, and its Consumer Healthcare businesses. The move should give each unit a better opportunity to stand on its own. That process is expected to be completed sometime in the middle of this year.
Technically speaking, GSK saw a sizable increase from March of last year to mid-January, rising from about $35.50 to $47 before following the broad market’s momentum lower to start the month of March. In the last several days, the stock appears to have stabilized enough to start building some bullish momentum off of latest support. Are the fundamentals strong enough to support a useful long-term value proposition at the current price? 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 $105.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 11.3%, while sales increased by 11.26%. In the last quarter, earnings declined -31.6%while Revenues improved about 2.62%. GSK’s Net Income versus Revenue is healthy, with signs of pressure in the last quarter; over the last twelve months, Net Income was 12.86% of Revenues and weakened in the last quarter to 7.8%.
Free Cash Flow: GSK’s Free Cash Flow is healthy, at more than $9.5 billion. This does mark an increase over the past year, when Free Cash Flow was $8.59 billion, and $7 billion three quarters ago. The current number also translates to a Free Cash Flow Yield of 8.67%.
Debt to Equity: GSK has a debt/equity ratio of .96, which implies debt should be manageable. Their balance sheet shows a little over $6.2 billion (up from $5.1 billion three quarters ago) in cash and liquid assets against a little less than $28.2 billion in long-term debt. Servicing their debt is not a concern.
Dividend: GSK pays an annual dividend of $2.18 per share, which at its current price translates to an impressive yield of 5.35%.
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 $70 per share. That means that GSK is significantly undervalued, with about 72% upside from its current price.
Technical Profile
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 upward trend from a low a year ago at around $35.50 to its high around $47 in January. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After peaking at 447 in January, the stock has moved into a clear downward trend, consistent with the momentum of the broad market. That momentum picked up pace at the early part of this month, but has since rebounded off of a pivot low at around $39.50 and is now sitting a little above the 50% retracement line a little above $41, marking current support at that level, with immediate resistance expected between $42.50 and $43. A push above that level should have upside to about $45, while a drop below $41 has limited downside to the last pivot low at around $39.50.
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 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 continued push above $41 as a signal to buy the stock or work with call options, using $43 as a useful bullish profit target. If the stock falls below $41, you could also consider shorting the stock or buying put options, using $39.50 as a practical bearish profit target.