Quick Value 3.29.21 ($GSK)

GlaxoSmithKline - Multi-year underperformance but an upcoming spin-off

Market Performance

Market Stats

GDP growth by year…

Q4 GDP had only a few categories still struggling with growth — consumer purchases for goods and private investment in nonresidential structures.

Federal Reserve board members view GDP growth in 2021 at a 6.5% rate and 3.3% in 2022. They also see continued declines in unemployment and above-average inflation (according to their preferred measure).

Based on those projections, by end of 2022, including the lost year of 2020 from COVID, GDP growth would still have been a 2.3% annualized rate from yearend 2017 to yearend 2022.

Quick Value

GlaxoSmithKline PLC ($GSK)

Woof… Talk about enduring some long-term underperformance…

Glaxo is a behemoth in the pharma industry. At $37 per share this is a $92bn company with ~$44bn in revenue. They are based in the UK.

This is mostly a pharmaceutical company. In 2019, they closed on a joint venture with Pfizer’s consumer health division to form a large consumer health business, selling well-known products such as Advil, Sensodyne, Pronamel, Robitussin, and Centrum.

Sales by segment

Interestingly, Glaxo plans to separate into 2 businesses via spin-off in 2022 — pharma and consumer healthcare.

With $2.98 in EPS and a $37 share price (US), Glaxo trades at a reasonable 12.5x earnings.

Net debt at the end of 2020 was ~21bn GBP / 2.4x leverage.

They haven’t repurchased any shares in 2020-2021 and doesn’t sound like they anticipate doing so. In 2020, cash flow went to fund the 4bn GBP dividend and then to repaying debt.

The dividend is fairly attractive at a near 6% dividend yield. But it certainly limits their ability for allocating cash to other areas like M&A or buybacks.

So we have 2 segments (I’m lumping pharma and vaccines together). Consumer is set for a spin-off in 2022 and produced 2.2bn GBP in operating income during 2020. That business more closely resembles a Johnson & Johnson. What’s left after that would be the 6.7bn operating income from the pharma/vaccine business.