Understanding GlaxoSmithKline's Valuation in 2016

GlaxoSmithKline’s valuation

As of February 28, 2016, GlaxoSmithKline (GSK) was trading at a forward PE (price-to-earnings) multiple of ~16.4x, compared to the industry average of 15.9x. Over the last one year, the company’s forward PE has been in the range of 15.0x–17.9x. The company has been trading at a higher PE than competitors like AstraZeneca (AZN), Sanofi (SNY), Novo Nordisk (NVO), and Novartis AG (NVS), which have been trading at PE multiples of 14.4x, 13.1x, 22.7x, and 14.4x, respectively.

The fundamental factors affecting stock prices and valuation include the performance of the growth platforms as well as the exclusivity of blockbuster drugs. Furthermore, foreign exchange rates play an important role in the profitability of the company, and consequently, these affect the stock prices and valuations.

This series will cover the major factors and segmental performances of GlaxoSmithKline’s products in an effort to understand the key drivers.

Forward PE

From an investor’s point of view, the two best valuation multiples used for valuing companies like GlaxoSmithKline are forward PE and EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiples, considering the relatively stable and visible nature of their earnings.

PE multiples represent what one share can buy for an equity investor. Based on the last five year’s multiple range, GSK’s current valuation is neither high nor low—over the past five years, GlaxoSmithKline’s PE multiple has ranged from ~10x to ~18x. GlaxoSmithKline’s valuation multiple has followed the industry’s overall trend over the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, GlaxoSmithKline will definitely be affected.

Forward EV-to-EBITDA

On a capital structure neutral and excess cash-adjusted basis, GlaxoSmithKline is currently trading at a forward EV-to-EBITDA of ~10.4x, which is lower than the industry’s average of ~11.7x. Other competitors such as AstraZeneca (AZN), Sanofi (SNY), Novo Nordisk (NVO), and Novartis AG (NVS), have forward EV-to-EBITDA multiples of 9.5x, 9.5x, 16.7x, and 14.1x, respectively.

Stock price performance

As of February 28, 2016, GSK’s stock has declined by 11.4% over past 12 months. During the same period, the iShares Global Health Care ETF (IXJ), which has about 2.5% of its total assets in GSK, declined in value by ~7.9%.

Analyst recommendations

Analysts estimate that the company’s stock has the potential to return ~20.1% over the next 12 months. Analyst recommendations show a 12-month targeted price of $47.00 per share, compared to the last price of $39.14 per share as of February 28, 2016. Also, ~29% of the analysts recommend a “buy,” and 71% of the analysts recommend a “hold,” according to Bloomberg’s consensus. (Changes in analyst estimates and recommendations are based on changing trends in the stock price.)