GlaxoSmithKline (GSK) – Q1 results have Biblical flavour

The first quarter results and statement from GSK has a biblical flavour. We are exalted to raise our gaze unto the hills from which cometh our salvation; which the regulators less poetically translate as future and forward statements. It was an occasion for a transcendental gazing into the future because the Q1 results were not themselves things that dreams are made of.

Reported Q1 sales were £5.6 billion, up 1%. Vaccines and consumer healthcare are doing very well – vaccine sales were up by 10% and health care sales by 4% – whilst pharmaceutical sales fell 7% – a kind of quarterly endorsement of the GKS strategy to grow the vaccine and healthcare business whilst pulling back from the   pharmaceuticals business. “Core” earnings per share were down 16% to 17.3p, due in part to a continuing fall in Advair sales, along with those of other established products. The Q1 dividend of 19p was thus uncovered by reported Q1 core earnings.           

Meanwhile, we are advised that the company’s operating environment was “shifting radically” and “particularly in relation to prices” and therefore that we must be prepared for “specific uncertainties” including a possible generic competitor to Advair in the US. There was also something about put options exercised by partners in the ViiV Healthcare business.

It is thus understandable why the share price failed to find support, where one might reasonably have hoped for it on the share price chart; instead bursting through it, like a bruised fruit through a paper bag. The share price, last seen, was 1,458p.

So, lifting our eyes to the dreaming distant hills what is foretold? Basically, it is that the management is reshaping the business to improve future profit margins whilst at the same time making significant cost savings. We are advised that cost implications, flowing from the difficult conditions of last year, will impact this year’s results. But that from 2016 to 2020 we should expect a sustained improvement in performance (assuming no change in exchange rates – the only way that such things can be reasonably estimated).

So what prospects do lie in those hills? GSK operates a trinity of businesses: pharmaceuticals (59% of revenue), health care (25% of revenue) and vaccines (16% of revenue).  The company reckons that by doing the deals it has done, in exchanging assets, it has created an economically and financially efficient structure with each business having critical mass and scale for global competition. It seems that the management has optimised structure, activities and prospects to increase its chance of commercial success. It has an R&D capacity of a wide range of prospect therapies and vaccines plus an over the counter health care business which seems buoyant (based on product ideas emerging from its research base). The appointment of a new non-exec director with executive experience at Unilever is indicative.

So is there enough value to buy the shares? The company has declared that it expects to pay a dividend of 80p a share for this year and the next two years. At a share price of 1,458p, that puts the shares on a prospective dividend yield of over 5.1%. Moreover, the management talk of a special dividend of 20p (arising from an estimated surplus from a deal) worth 1.37% . On the aforementioned basis, that suggest a 16.6% total income return over three years, taking us to 2018 when, if the company is correct, things should be improving for earnings.

Glancing at the chart, the shares are still trending down. On a five year chart there is arguably long term support at around 1,430p or so – pretty much close to where we are now. Have a look and watch for any resistance there. Personally, I like the look of these shares on this yield.