The Bullish Case of GlaxoSmithKline at Current Levels

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  • UK pharma stocks offer a buying opportunity in the current economic turmoil, given their defensive nature and large global footprint
  • GSK has become a leaner and more focused company after its recent restructuring
  • Haleon spin-off allows GSK to focus more on developing new drugs and gives it more financial muscle to pursue growth opportunities

It has been an interesting year for British investors. After outperforming all other developed markets through October, the benchmark fell sharply last week as investors shunned domestic stocks after new Prime Minister Liz Truss announced a mini-budget that doubted the the country’s financial credibility.

The widespread market rout sent assets at risk, bonds and tumbling last week.

The sell-off in the national currency was so strong that it prompted Truss to embrace the plan, leading the FTSE to rebound in recent days.

However, the volatility and the favorable exchange rate opened up many opportunities for foreign investors looking for quality stocks.

For these investors, UK pharma stocks offer an area to focus on, given their defensive nature and large global footprint. Global pharmaceutical companies will also benefit from the weaker British currency, as most of their sales are made in .

I particularly like GlaxoSmithKline (NYSE:), which has lost about a third of its value in the past three months, a downward move that has boosted its dividend yield to more than 5%.

GSK weekly chart

Here’s why I think GSK is a good fit for investors looking for value in this uncertain environment:

Corporate restructuring

GSK, headquartered in London, has underperformed in recent years due to a range of challenges, including clinical failures in oncology and the absence of the lucrative market for early COVID-19 vaccines, although it is one of the world’s leading vaccine manufacturers.

However, it is now a much leaner and more focused company after its massive restructuring under the leadership of Emma Walmsley.

In July, the pharmaceutical giant completed the spin-off of its consumer healthcare business, Haleon (NYSE:), the maker of painkillers Panadol and toothpaste Sensodyne.

As part of the split, GSK received a special dividend of around £7 billion, significantly reducing the company’s leverage while giving it more flexibility to invest in its drug pipeline.

Healthy pipeline

Last summer, the company agreed to buy Affinivax Inc. for $3.3 billion, adding possible next-generation vaccines. That deal was followed by its takeover of Sierra Oncology, a maker of targeted therapies for rare forms of cancer, in April.

The new GSK, with a particular focus on biopharma and vaccines businesses, has a strong drug pipeline that includes vaccines against respiratory syncytial virus, for which there is no approved vaccine yet.

In addition, revenues from Shingrix, a shingle hit that is one of Glaxo’s best-selling products, are expected to double over the next five years.

This may be why many of the investment models used by InvestingPro indicate that there is significant upside potential for GSK shares.

Fair value of GSK

Fair value of GSK

Source: InvestingPro

One of the primary motivations for investing in any pharmaceutical stock is to seek income stability due to the sector’s safe-haven status in times of distress. After the Haleon spin-off, I think GSK’s payout is much safer with more upside potential.

In the second quarter report, the first since completing its restructuring, GSK reported a 13% jump in year-over-year sales, with EPS growth of 6%.

GSK also said its adjusted operating profit margin increased by 7%. The company also improved its outlook for the full year, as improved revenues and margins pushed the company to beat expectations for the second quarter.

GSK’s quarterly dividend, which it cut this year from $0.63 to $0.341 due to the fallout, has become attractive after the recent selloff. Shedding more than 5% at the time of writing, GSK stock offers a good entry point to lock in that juicy yield.

Conclusion

After its recent restructuring, GlaxoSmithKline has become a growth-driven story. GSK’s global footprint and extensive portfolio of pharmaceutical patents shield its revenues from the current economic upheaval in Britain. The recent sell-off in its shares therefore provides an opportunity to lock in its higher dividend yield.

Disclosure: At the time of writing, the author does not own GSK. The opinions expressed in this article are solely the opinion of the author and should not be taken as investment advice.

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