A streamlined strategy

The primary reason its shares have performed so well over the past month is down to investors growing more confident in the direction new CEO Emma Walmsley is taking the company. Although her background is in the consumer health side of the group, which sells items such as toothpaste and flu treatments, she has made it clear that her primary focus is the group’s core pharma expertise, which offers higher growth prospects and higher margins than the consumer side of the business.

She won investors over recently by declining to bid on the consumer health business of Pfizer that was rumoured to be in the works for a sum of some $20bn. Instead, Walmsley passed and instead agreed with Novartis to purchase the 36.5% stake in their consumer health joint venture it doesn’t already own for a more reasonable $13bn. This deal makes a great deal of sense as the joint venture has been performing well and GSK has already done the heavy lifting of integrating the business into its own.

Furthermore, since Novartis has held an option to sell the business to GSK when it desired any time before 2035, this sale agreement and not bidding on the Pfizer disposal makes the state of GSK’s balance sheet easier to understand for investors. While net debt at year-end of £13.1bn was already elevated against free cash flow of £3.4bn, GSK should be able to safely fund the acquisition and maintain its dividend cover thanks to rising cash flow and a stable earnings outlook. This is especially true if it pursues non-core asset disposals such as that of malted milk drink Horlicks, which could fetch as much as £2.5bn.

Enviable future growth prospects 

On top of these reassurances, GSK’s core business continues to perform very well. Last year revenue increased 8% to £30.2bn while adjusted operating profits bumped up 12% to £8.5bn. This performance was driven by solid trading from the consumer health division, sales of new pharma products rising over 50%, and a lack of a generic competitor to blockbuster asthma treatment Advair in the US.  

Together, I think these assets put GSK in a great position to grow and see its share price rise significantly in the medium term. The soon to be completely controlled consumer health business should continue to generate steady, non-cyclical growth and high cash flow. This rising cash flow can then be deployed to cover the 5.6%-yielding dividend that looks increasingly safe, as well as investment back into its very full drugs pipeline that is already producing high-growth products. And with its growth prospects and impressive dividend, I reckon at its current valuation of under 14 times forward earnings, GSK could be a bargain for long-term, buy-and-hold investors. 

The post Why GlaxoSmithKline’s share price could be about to skyrocket appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Looking ahead, further volatility may be on the cards. Investors still seem uncertain as to whether to be bullish or bearish, with the end result being a lack of clear direction in the index. However, due to the growth potential on offer within the banking and pharma sectors in particular, the index could enjoy a rise to 8,000 points over the medium term.

Banking stocks

The outlook for the banking sector seems to be relatively bright. While it has not been a popular industry among investors in the past, low valuations suggest that it could now offer wide margins of safety. They could translate into growth potential, with the health of a number of FTSE 100-listed banks having improved dramatically in recent years.

The profitability of the sector could be positively catalysed by rising interest rates. Although inflation may have fallen slightly in the last few months, there remains an appetite among policymakers to raise rates. This could provide more profitable trading conditions for the sector and may lead to greater justification for higher ratings.

Additionally, UK banks are now in the process of generating excess capital. They have largely restructured and repaired their balance sheets, and may now be able to deliver rapidly-rising dividends. As such, they may deliver high capital growth and help to push the FTSE 100 upwards over the medium term.

Pharma stocks

The pharma sector may also have a positive impact on the FTSE 100 in future. Demand for healthcare products across the globe continues to increase, with a rising world population and an ageing one too providing a possible tailwind over the coming years. This could mean that trading conditions for companies across the sector improve, and may mean they can command significantly higher valuations than at present.

The popularity of pharma stocks has declined in recent years. Investors have become less risk-averse and have focused on cyclical companies that offer less downside protection during challenging economic periods. Increased risk-taking has meant that the defensive characteristics of healthcare companies has declined to a large extent.

However, the recent bout of stock market volatility may now attract capital to large-cap pharma stocks due to their relatively low correlation with the wider economy, as well as their solid business models. As such, they could perform well in future and may provide the FTSE 100 with a major catalyst over the coming months. Alongside the upbeat outlook for banking stocks, this could help to push the index towards 8,000 points.

The post Why banking and pharma stocks could drive the FTSE 100 to 8,000 points appeared first on The Twelfth Magpie.

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Two companies in particular have caught my eye: a FTSE 100 giant whose shares have performed even worse than the sector average and a FTSE 250 firm whose shares have bucked the trend.

Blue-chip bargain

Rare diseases specialist Shire (LSE: SHP) completed a $32bn acquisition of US firm Baxalta in June 2016 and its shares went on to reach a post-acquisition high of over 5,200p a few months later. However, market sentiment has since waned conspicuously. The shares started this year at under 4,000p and annual results a fortnight ago failed to arrest a further decline. The shares are currently trading at little more than 3,000p.

At the time of the Baxalta acquisition, Shire had projected over $20bn annual revenues by 2020. It’s disappointing this has since been revised down to $17bn-$18bn but I believe the share price has fallen much too far.

The company’s 2018 earnings guidance is for between $14.90 and $15.50 per American Depository Share. Converted to ordinary shares at current exchange rates, the range is 355p to 370p, giving a price-to-earnings (P/E) ratio of between 8.5 and 8.2.

The P/E makes Shire cheaper than its sector peers and net gearing of 53% is also relatively low. Strong free cash flow during 2017 reduced net debt by $3.4bn to $19.1bn, while year-end shareholder funds stood at $36.2bn. With its market capitalisation of £27.5bn ($38.5bn) and bargain basement sub-10 P/E, I rate this Footsie blue-chip a ‘buy’.

Mid-cap marvel

Also on my ‘buy’ list is FTSE 250 veterinary pharmaceuticals specialist Dechra (LSE: DPH). The company announced strong half-year results today and the shares are up over 5% to 2,450p, as I’m writing. This is a new all-time high and takes the return over the last 12 months to more than 50% to value the business at £2.5bn.

Dechra reported a 12.5% rise in first-half revenue (11.2% at constant exchange rates), with North America contributing 20.7% and Europe 5.8% at CER. Higher profit margins fed down to a 20% increase in earnings per share (EPS).

Continued growth at this rate would see EPS of 77.6p for the company’s current financial year ending 30 June. On the face of it, the resulting P/E of 31.6 looks expensive, but the company has just completed two exciting acquisitions, of AST Farma and Le Vet Beheer, for a total consideration of €340m.

These two companies have been a primary target for Dechra for a number of years. The board said the deals realise “a rare opportunity to strengthen our EU segment in all the major European countries in which we operate.” I believe the springboard this provides Dechra for both expanding its pipeline and improving its reach makes the premium P/E worth paying and I rate the stock a ‘buy’.

The post 2 pharma stocks I’d buy in March appeared first on The Twelfth Magpie.

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• With a 7% yield, is this dividend share a no-brainer?
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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Highly effective and productive

Alliance was founded in 1996 and entered into a fostering arrangement with Novartis, under which it took over the marketing and distribution of 16 of the Swiss giant’s speciality prescription brands. It’s gone on to acquire or license the rights to 90 established pharmaceutical and consumer healthcare products from various companies.

Alliance’s low-risk business model has been highly effective and productive. Management advised in a recent pre-close trading update that annual revenue broke through £100m for the first time in 2017.

Robust growth

The company continues to expand its portfolio under founder and chief executive John Dawson and a board of fellow industry veterans. Two recent product acquisitions — Vamousse (head lice) from TyraTech and Ametop (local anaesthetic gel) from Smith & Nephew — will be immediately earnings enhancing.

Revenue for 2018 is forecast to increase 14% to £118m, with earnings and dividends similarly increasing to 4.8p and 1.5p. The forward price-to-earnings ratio of 14 and dividend yield of 2.2% represent great value to me for a well-managed business with a history and outlook of robust growth. As such, I rate the stock a ‘buy’.

Seductive stories

Optibiotix (LSE: OPTI) is a rather different investment proposition to Alliance and also a more speculative one. Generally, I steer well clear of companies that are at the pre-revenue (or negligible revenue) stage, as a large proportion of them disappoint. But occasionally one pops up where I see genuine potential for high rewards.

Of course, all such stocks have a seductive ‘story’ — Optibiotix’s is products that modulate the human microbiome to tackle such things as obesity, high cholesterol and diabetes — but it takes more than a seductive story for me to consider it a potential investment.

Crucial questions

There are a number of crucial questions to which I must feel able to give an affirmative answer. These include: Are the directors of the company experienced and credible? Is its technology credible, patent protected and so on? Does it have a sound commercial strategy for bringing its products to market?

For me, Optibiotix ticks all the boxes for these sorts of question. Of course, there’s then another crucial question: How much would I be willing to pay for the shares?

Multibagger potential

When I wrote about the company last year, the shares were trading at 68.5p and the market capitalisation was £54m. This is the sort of level from which it’s possible to envisage a serious multi-bagger, if the company were to deliver on its potential. And it looks more attractive today, because the shares have slipped below 60p in the recent market wobble taking the market cap to £46m.

Optibiotix is the sort of stock I’d only take a very small position in as part of a diversified portfolio — sized to have a good impact on returns if hugely successful and a tolerable level of negative impact if a total write-off. In short, I rate the stock a ‘buy’ at the high-risk end of the spectrum.

The post 2 ‘secret’ pharma stocks I’m considering buying right now appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.