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GlaxoSmithKline (GSK)

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simoan
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GlaxoSmithKline (GSK)

#384132

Postby simoan » February 6th, 2021, 11:55 am

I felt it worth starting a thread to discuss the investment merits (or otherwise!) of GSK. It seems so deeply unloved I am finding it difficult to resist building a sizeable position in the coming months on a 2 year view. There was a thread earlier in the week (see https://lemonfool.co.uk/viewtopic.php?f=94&t=16069) but Company Analysis probably isn't the right place to discuss the investment thesis further. I know the danger is that any discussion could quickly disappear into the weeds by discussing the high yield/dividend aspects, but that is of no interest here.

More generally, the market seems to have a real downer on defensive stocks currently. I ran a filter this morning to see how many FTSE 100 companies had retreated to within 20% of their intra-day lows of the March 2020 sell-off. GSK is sitting right on the 52 week intra-day low and only Pennon has been a worse performer...just. Supermarkets, Utilities, and Consumer Staples made up the rest.

So why has the market got such a downer on GSK? Yes, the Pharma side has some important drugs coming off-patent and is subject to competition from generics whilst not much is coming through the pipeline. Yes, the vaccine business had a bad year as there was less call for standard vaccines during the pandemic. Yes, the Consumer Healthcare business is a bit of a mess and has not really settled yet after the merger with Pfizer but it still generated revenue of £10bn with >20% operating margins. Put that on the same rating as Reckitt Benckiser, for instance, and you get a £32bn business on its own. Use Unilver as a benchmark and you get nearer to £40bn. The total market cap of GSK is currently < £64bn at a price of 1265p.

I feel there is inherent value that is not being reflected in the current market price. GSK looks very unloved and oversold to me. That doesn't mean it can't go lower, and probably will given current sentiment. Call me cynical, but I think the market will change it's tune later this year when all the investment banks line up for their piece of the pie for the demerger of the Pharma and Consumer healthcare divisions. And of course, once the demerger has taken place GSK becomes two bite sized pieces that make them ripe for acquisition by larger competitors. My personal opinion is that GSK likely won't exist in 3 years time in any form. In the meantime, I believe there is money to be made.

All the best, Si

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Re: GlaxoSmithKline (GSK)

#384135

Postby Mike88 » February 6th, 2021, 12:03 pm

simoan wrote:More generally, the market seems to have a real downer on defensive stocks currently.
Si


Hasn't the market had a downer on defensive stocks for some time as holders of many Equity Income funds will verify?

simoan
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Re: GlaxoSmithKline (GSK)

#384138

Postby simoan » February 6th, 2021, 12:07 pm

Mike88 wrote:
simoan wrote:More generally, the market seems to have a real downer on defensive stocks currently.
Si


Hasn't the market had a downer on defensive stocks for some time as holders of many Equity Income funds will verify?

It was just an observation. I was expecting to see Banks and Oil Companies but there were none. I have no knowledge of Equity Income funds and no interest in them. I just want to discuss GSK, nothing else.

All the best, Si

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Re: GlaxoSmithKline (GSK)

#384191

Postby monabri » February 6th, 2021, 2:30 pm

(for disclosure I too initiated a small position in GSK having held once and then sold only to rebuy in the last week).

GSK was/is late to the "vaccine party" - maybe it can atone for this via the CureVac deal?

https://www.theguardian.com/world/2021/ ... id-vaccine

Then there is the slowdown in sales of Shingrix (and others - see link)

https://www.fiercepharma.com/pharma/shi ... d-covid-19

This article in "fiercepharma" alludes to other problems

https://www.fiercepharma.com/pharma/gla ... ok-analyst

"Between the failure of its late-stage cancer drug bintrafusp alfa in a key clinical trial and an unexpected inspection delay for another oncology hopeful, dostarlimab, GlaxoSmithKline is having a bad week, to say the least. But some pharma analysts worry that those problems are more than just short-term blips. They raise questions about GSK’s dealmaking and cast doubt on its forecasts"

The Shingrix issue will no doubt reduce as Covid vaccinations proceed. Not all drugs lead to success and blockbusters - I leave it to the management to sort out these other issues.

simoan
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Re: GlaxoSmithKline (GSK)

#384200

Postby simoan » February 6th, 2021, 3:17 pm

Hi monabri,

Thanks for your thoughts. There's no doubt an investment in GSK is a highly contrarian act currently, and it only makes it more attractive to me that "pharma analysts" are bearish on the drug pipeline. What do they know? How can they predict the future better than anyone who is not a pharma analyst? The fact is, they can't. My sisters other half used to be a pharma analyst for a big bank and he never even had a relevant degree, so I know they know little more than me what the future may hold. As such, I'm not sure over analysing things and considering individual drugs is of much use. We should leave that to people who think they can predict the future.

On the vaccine front, I am attracted to situations where there is a fall in revenue which is likely temporary in nature. Many companies that have seen their business badly affected by the pandemic have already bounced back strongly with no return to profitability in sight, and yet a company that has generated free cash of 100p per share in 2020, as GSK did, is getting hammered. The vaccine business has stonking margins. For FY20 they were 39% with £2.7bn of operating profit on sales of £7bn. That makes it a highly attractive business in its own right IMHO. Again, you're maybe looking at a business worth £25bn standalone.

I think we can write-off any investments in Covid vaccines and still make a good case for investment. It sure hasn't done the Pfizer share price any favours in the past year, or for that matter Astrazeneca.

ll the best, Si

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Re: GlaxoSmithKline (GSK)

#384211

Postby Dod101 » February 6th, 2021, 3:56 pm

The Covid vaccine has not done much for Astrazeneca's share price but then they claim that they are supplying the vaccine at cost. Whatever else it has done though, is it has provided great publicity for Astrazeneca.

I hope you are right about Glaxo. I hold it but do not have much faith in it I must say and its record over the last 5 or so years is very poor.

Dod

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Re: GlaxoSmithKline (GSK)

#384215

Postby Arborbridge » February 6th, 2021, 4:05 pm

As Simoan wrote: There's no doubt an investment in GSK is a highly contrarian act currently, and it only makes it more attractive to me that "pharma analysts" are bearish on the drug pipeline. What do they know?


We've been here before, haven't we - remember the patent cliff? : what happened to that, which I seem to remember was going to wreck AZN. Turns out, a lot of this "news" is the speculation of the blind leading the blind. HYP was designed so we can mostly not have to sort through what's a genuine threat and what isn't.

Arb.

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Re: GlaxoSmithKline (GSK)

#384241

Postby TheMotorcycleBoy » February 6th, 2021, 5:11 pm

Possibly the relative strength of GBP negatively influences the market valuation? As with ULVR?

simoan
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Re: GlaxoSmithKline (GSK)

#384247

Postby simoan » February 6th, 2021, 5:21 pm

Dod101 wrote:The Covid vaccine has not done much for Astrazeneca's share price but then they claim that they are supplying the vaccine at cost. Whatever else it has done though, is it has provided great publicity for Astrazeneca.

I hope you are right about Glaxo. I hold it but do not have much faith in it I must say and its record over the last 5 or so years is very poor.

Dod

I don't believe Pfizer are providing their Coronavirus vaccine at cost though, and I'm not sure all the publicity for AZN has been that good in Europe, for instance. I just don't think anyone will want to be seen to be making lots of profit from Covid, and so I don't view it as a big loss of potential profit for the GSK vaccine business. Embarrassing maybe, but not material to the ongoing business. Obviously, the money invested in the JV with Sanofi could be written off if the vaccine they are developing ultimately doesn't work, which looks likely, so that's a negative in the short term.

As to the last 5 years, that's of little interest right now and the next 2-3 years is the interest based on a sum of the parts valuation on what GSK may look like post de-merger in 2022. There seem to be so many negatives that it seems to me, analysts in particular, have lost sight of any positives at all. That just strikes me as overly pessimistic when you look at the profitability metrics of the individual parts, which is the main attraction. There are plenty of much poorer companies with stagnant or falling revenues than GSK in the FTSE 100.

Anyway, I dipped a toe in the water last week. I don't see too much downside from here and enough upside on a 2-3 year view to be worth holding some. How much worse can sentiment get? I will look to buy 3 or 4 more blocks in the next 6-9 months, unless something changes radically.

All the best, Si

simoan
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Re: GlaxoSmithKline (GSK)

#384249

Postby simoan » February 6th, 2021, 5:25 pm

TheMotorcycleBoy wrote:Possibly the relative strength of GBP negatively influences the market valuation? As with ULVR?

Hi Matt,

Yes, a strong pound will affect profit stated in GBP but no more than most FTSE 100 companies reliant on overseas earnings. I don't generally take currency fluctuations into account because it is not something you can predict. What I'm trying to understand is why GSK is the most unloved share in the FTSE 100 over the past 12 months. It did after all report EPS of 115.9p last week for FY 2020, of which 100p converted into free cash. Yes, revenue has not grown but it has not gone backwards like many of the other FTSE 100 constituents. Compare it to the results of the big oil companies this week...

All the best, Si

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Re: GlaxoSmithKline (GSK)

#384254

Postby Arborbridge » February 6th, 2021, 6:01 pm

Corporates grow and grow and grow: we all know what the initials GSK stand for - great companies in their own right, and something of the history. Remember Beecham and Welcome? Then in another generation, a group of start alecs think it's a good idea to break it all up again, thus making a quick buck, no doubt.

Then the shattered remains of those good endeavours rise again, or get wrecked by johnny-cum-latelies.

Arb.

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Re: GlaxoSmithKline (GSK)

#384397

Postby dealtn » February 7th, 2021, 11:29 am

Dod101 wrote:
I hope you are right about Glaxo. I hold it but do not have much faith in it I must say and its record over the last 5 or so years is very poor.

Dod


Why hold it then?

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Re: GlaxoSmithKline (GSK)

#384398

Postby scrumpyjack » February 7th, 2021, 11:33 am

dealtn wrote:
Dod101 wrote:
I hope you are right about Glaxo. I hold it but do not have much faith in it I must say and its record over the last 5 or so years is very poor.

Dod


Why hold it then?


I share Dod's view so I sold them a while ago. As I have sold them they are likely to do very well in future :D

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Re: GlaxoSmithKline (GSK)

#384404

Postby SalvorHardin » February 7th, 2021, 11:44 am

The Pharmaceutical companies' habit of reporting "core earnings", which exclude many recurring costs, puts a big question mark over the sector IMHO.

Here's a previous thread

https://www.lemonfool.co.uk/viewtopic.php?t=15654

Here's a FT article from 2015 where Terry Smith explains why he avoids pharma

https://amp.ft.com/content/c628717c-5000-11e5-8642-453585f2cfcd

Dod101
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Re: GlaxoSmithKline (GSK)

#384433

Postby Dod101 » February 7th, 2021, 1:01 pm

dealtn wrote:
Dod101 wrote:
I hope you are right about Glaxo. I hold it but do not have much faith in it I must say and its record over the last 5 or so years is very poor.

Dod


Why hold it then?


That is a very good question. I think I have made it clear that I am considering selling it along with Imperial Brands but I need to identify some other share which is more attractive.

Dod

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Re: GlaxoSmithKline (GSK)

#384461

Postby Darka » February 7th, 2021, 2:09 pm

SalvorHardin wrote:Here's a FT article from 2015 where Terry Smith explains why he avoids pharma

https://amp.ft.com/content/c628717c-5000-11e5-8642-453585f2cfcd


I sold AZ for similar reasons a while back and will get rid of GSK at a more suitable time.

The proceeds will go into Investment Trusts.

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Re: GlaxoSmithKline (GSK)

#384469

Postby simoan » February 7th, 2021, 2:17 pm

SalvorHardin wrote:The Pharmaceutical companies' habit of reporting "core earnings", which exclude many recurring costs, puts a big question mark over the sector IMHO.

Here's a previous thread

https://www.lemonfool.co.uk/viewtopic.php?t=15654

Here's a FT article from 2015 where Terry Smith explains why he avoids pharma

https://amp.ft.com/content/c628717c-5000-11e5-8642-453585f2cfcd

Hi Salvor,

Yes, I remember the Terry Smith FT article from 2015. I don't read the FT but as a direct investor with Fundsmith I get them emailed to me. It was one of the factors behind my selling AZN shortly after reading it which was not the greatest decision with hindsight! I was mainly spooked by the falling ROCE rather than the accounting treatment of intangibles. I think really he is more pointing the finger at pure pharmas like AZN with regard to "core" earnings as I have never seen GSK use this term. I would say GSK has more in common with Johnson & Johnson than AZN, and let's face it, if Terry doesn't like intangibles and litigation costs in the P&L, then he's had a stomach full from his holding in JNJ of late!!

Actually, one of the things I like about GSK is that the accounts are clearly presented and fairly easy to read, unlike most FTSE 100 companies. OK, maybe not up to the level of disclosure of Next, but still pretty good. I'm not sure who said it originally but we always have to remember that: "Earnings are a matter of opinion, Cash is a matter of fact". So yes, you have to make your own mind up about adjustments and reconciliation between Statutory and Adjusted numbers are clearly shown in the GSK results. Large differences between these numbers are one of the things I look for and historically there have been significant differences although strangely not in the FY20 numbers.

It's the reason I focus more on cashflow and less on earnings related metrics, and is why I keep banging on about the 100p free cash per share that GSK managed to generate in a bad year. If that's the sign of a company with really seriously bad problems then there are a number of others whose share prices have been far perkier of late who would kill to be in the same position. Most airlines don't generate any cash in a good year - look at IAG and EasyJet as examples!

I guess what I'm most confused about, is that even if you take what Terry Smith says on board about Big Pharma, the relative performance of GSK still doesn't make sense. Soon we will be able to make a direct comparison between AZN and GSK. AZN is on a PER of 20, JNJ is on a PER of 17, while GSK is on 11. Something doesn't feel right which is why I'm kicking the tyres as hard as I can.

All the best, Si

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Re: GlaxoSmithKline (GSK)

#384473

Postby SalvorHardin » February 7th, 2021, 2:32 pm

simoan wrote:I think really he is more pointing the finger at pure pharmas like AZN with regard to "core" earnings as I have never seen GSK use this term. I would say GSK has more in common with Johnson & Johnson than AZN, and let's face it, if Terry doesn't like intangibles and litigation costs in the P&L, then he's had a stomach full from his holding in JNJ of late!!

Yes. GSK is more like J&J, having a large consumer goods / non-pharmaceutical arm.

I used to own a few AstraZeneca shares, but I sold them a year after they started to report core earnings in preference to statutory earnings.

Terry Smith's book "Accounting for Growth" is a huge influence on my investing style and I generally avoid companies which make up their own definition of earnings per share.

That said, pharma isn't something that's firmly in my circle of competence, though having recently bought a big stake (by my standards) in Moderna I've started reading a lot about the subject :D

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Re: GlaxoSmithKline (GSK)

#384487

Postby simoan » February 7th, 2021, 2:50 pm

SalvorHardin wrote:That said, pharma isn't something that's firmly in my circle of competence, though having recently bought a big stake (by my standards) in Moderna I've started reading a lot about the subject :D

Other than holding AZN several years ago I don't generally invest in Pharma companies either. So I feel I'm going out on a limb slightly with GSK. I do like healthcare as a sector though and hold some UK small caps e.g. Bioventix, Craneware, Medica & EMIS Group. Not to mention some exposure through holding Diploma and Smithson IT.

All the best, Si

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Re: GlaxoSmithKline (GSK)

#384732

Postby simoan » February 8th, 2021, 1:21 pm

So, I'm not a pharma analyst, I'm just a simple soul who knows nothing about the future. To illustrate how undervalued GSK may be compared to a peer group I put together a table showing valuation metrics of the biggest Pharma companies, most of whom are US listed.


All of the data for US listed companies came from a free source (SeekingAlpha) and nearly all are based on recently announced FY2020 numbers. AZN announces FY20 this week. The table shows Trailing Twelve Month (TTM) figures so makes no allowance for broker forecasts for FY21 numbers N.B. The PER for Bristol Myers Squibb is "N/A" since it made a loss of $4 per share in FY20. The table is ordered in terms of share price performance over the past year.

As you can see the GSK share price has been by far the weakest in the past year. And yet it has the 2nd lowest Price to Earnings Ratio (PER=11.1), 2nd lowest Price to Sales Ratio (PSR=1.9), and 2nd lowest Price to Operating Cashflow (P/OCF=7.5) ranking and 4th lowest EV/EBITDA (=10.8) of the whole peer group. Out of interest the average values for the peer group are: PER = 29.8 (ignoring GILD), PSR = 4.7, P/OCF = 16.6 and EV/EBITDA = 14.9.

I still don't get it. Why is GSK so unloved compared to the peer group?

All the best, Si


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