With shares of GlaxoSmithKline (NYSE:GSK) trading at around $44.58, is GSK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
If you like dividends, then you probably love GlaxoSmithKline. However, there are many headwinds for the company. What really hints at the future more than anything else is that R&D will head toward smaller therapeutic products. The word “smaller” isn’t a word you want to use when you’re looking to impress. GlaxoSmithKline is also focused on cost-cutting, which doesn’t indicate growth. If you look at annual revenues, they’re heading in the wrong direction. Other negatives include patent protection losses and the rise of generics. This isn’t an ideal situation. If GlaxoSmithKline can’t find avenues for renewed growth, then the will be in danger of being cut.
The good news is that GlaxoSmithKline is using innovation and acquisitions to growth. In regards to the latter, there are rumors than GlaxoSmithKline might purchase Theravance Inc. (NASDAQ:THRX). In other news, GlaxoSmithKline recently filed its type-2 diabetes drug, Albiglutide, for regulatory approval with the EMA (it has already been submitted to the FDA). This is one-time-per-week injection drug for adults with type-2 diabetes. Analysts estimate sales could reach $285 million. Many investors were hoping for a higher estimate.
The biggest issue for GlaxoSmithKline, as well as for other big pharmaceutical companies, is the ever-increasing threat of generics. Does this mean GlaxoSmithKline is no longer a worthwhile dividend play?
Let’s take a look at some important numbers prior to forming an opinion on this stock.
E = Equity to Debt Ratio Is Weak
The debt-to-equity ratio for GlaxoSmithKline is much weaker than the industry average of 0.40.
T = Technicals on the Stock Chart Are Mixed
GlaxoSmithKline has performed well over a three-year timeframe. However, it has underperformed Merck & Co. Inc. (NYSE:MRK) and Novartis AG (NYSE:NVS) year-to-date. GlaxoSmithKline yields 6.20 percent, Merck yields 4.00 percent, and Novartis yields 2.40 percent.
E = Earnings Have Been Inconsistent
When we look at the last quarter on a year-over-year basis, we see a decline in revenue.
T = Trends Do Not Support the Industry
Big are slowly falling out of favor. It might be difficult to see now because it’s still early in the game, but generics are making a big move. Longs will fight this statement tooth and nail, but all three companies listed above saw a decline in revenue in 2012. Generics are much more affordable, which makes them more attractive in a weak economy.
GlaxoSmithKline is currently suffering from poor debt management, a lack of growth, and subpar performance. On the other hand, GlaxoSmithKline has over $7 billion in operating cash flow, which is more than enough to make strategic moves. A yield of 6.20 percent is also very enticing. As long as the dividend isn’t cut, GlaxoSmithKline is a WAIT AND SEE at worst, but keep a close eye on developments.
Copyright Wall St. Cheat Street. All rights reserved.