Glaxo Returns to Growth

This article has been adapted from our sister site across the pond, Fool U.K.

I have a vivid memory as a young lad of watching my dad play in a football game -- a cup tie away to "Beechams."

The match was played against the backdrop of a huge, spanking new complex (a futuristic vision to my youthful eyes); and Beechams' strip was an extraordinarily bright orange -- unheard of in those days -- another harbinger of a brave new world. They inflicted a heavy defeat on my dad's team, so I wouldn't be surprised if they were also using some ahead-of-its-time "diamond" formation!

At the time, I was too young to know who Beechams were, or that the perennial maxim of pharmaceutical companies is "'innovate or die."

Return to growth
(NYS: GSK) , the product of a series of mergers, of which the last was Glaxo Wellcome and SmithKline Beecham in 2000, has just released its third-quarter results.

There were no surprises: Q3 revenue of 7.1bn pounds came in slightly ahead of analysts' forecasts, and pre-tax profit of 2bn pounds was in line with expectations. The results represent a return to growth after a fall-off in Glaxo's anti-flu, anti-viral, and diabetes drugs knocked its first-half numbers.

Past and future
That strange breed of investor for whom a line on a chart is the be-all and end-all will tell you that Glaxo's shares have gone nowhere for 10 years, and to avoid this "dog" like the plague.

Fundamental investors, like me, will tell you that Glaxo's business has performed over the period, and that the reason its shares have done nothing is due to a de-rating. Caught up in the over-exuberance of the dot-com era, the company was on an eye-wateringly high price/earnings (P/E) ratio.

In other words, Glaxo was a bad-value investment on fundamentals 10 years ago, but the de-rating has brought it into value territory in the last couple of years.

The shares have had a good run over the past six months, and are trading at 1,390p at the time of writing. That puts them on a P/E of 12 and a yield of 5%, based on current year earnings and dividend forecasts.

Glaxo is at a premium to its European peers: AstraZeneca (NYS: AZN) , for example, is on a P/E of less than 7 and a yield close to 6%. But the premium is probably merited, due to Glaxo bearing less of a burden of near-term patent expiries than most of its rivals.

With its strategy of diversifying beyond white pills and western economies into consumer health care and emerging markets, I expect Glaxo to be a company that will continue to innovate rather than die.

I wonder what the works football team's strip looks like these days!

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