Is GlaxoSmithKline an Exciting Emerging Market Play?


LONDON -- While crippling austerity in Europe and fiscal obstacles could put the brake on growth rates there, in developing regions a backdrop of accommodative central bank action, elevated commodity prices and rising personal affluence levels have created an environment of exceptional commercial opportunity.

The divergence between the growth prospects of traditional and developing markets is borne out by latest International Monetary Fund's (IMF) growth projections, which expects developing nations and emerging markets to expand 5.3% and 5.7% in 2013 and 2014, respectively. By comparison, it anticipates that the US economy will rise 1.9% this year and 3% in 2014, while eurozone GDP is forecast to dip 0.3% in 2013 before rebounding just 1.1% next year.

Bubbly activity in these developing geographies can create large opportunities for many London-listed firms. Today, I am looking at GlaxoSmithKline and assessing whether their operations in these regions are likely to underpin solid earnings growth.

Asia-Pacific demand hots up
GlaxoSmithKline announced in this month's first-quarter trading update that group revenues dipped 2% during the period, to 6.5 billion pounds, in turn pushing operating profit 26% lower to 1.6 billion pounds.

The firm affirmed its commitment to creating a "diversified global business," an essential strategy given that its traditional markets continue to struggle and accelerating economic growth in emerging regions is set to drive health care demand higher in coming years.

Revenues from the U.S. and Europe dropped 5% and 4% in January-March respectively, to 2.1 billion pounds and 1.8 billion pounds. And Japanese turnover sunk 6% to 510 million pounds. By comparison, sales from the "Emerging Asia Pacific" (EMAP) region advanced 6% annually to 1.7 billion pounds, and sales from this area now account for 25.7% of total turnover. This is up almost two percentage points from the corresponding 2012 period.

Groupwide pharmaceuticals and vaccines turnover slipped 2% lower to 5.1 billion pounds due to falling demand across all of GlaxoSmithKline's established markets, it announced.

But pharmaceuticals and vaccines sales from the EMAP area bucked this trend, rising 8% in the first quarter to 1.1 billion pounds, pushed by a 15% demand increase in the Middle East and Africa to 302 million pounds. Elsewhere, Chinese sales rose a massive 19% in the three-month period to 199 million pounds.

So is GlaxoSmithKline a buy?
City analysts expect earnings per share to edge 2% higher in 2013, to 115 pence, before gaining traction thereafter -- growth of 8%, to 125 pence, has been penciled in for 2014. The company is boosting R&D to counter the issue of IP expiration across many of its drugs, building a lucrative pipeline of new products to underpin long-term revenues, and six key compounds are currently undergoing regulatory testing.

The pharma giant has proved itself to be a reliable dividend builder in recent years, even in times of significant earnings pressure, and brokers expect last year's 74 pence per share payout to increase to 78 pence per share and 81.9 pence per share this year and next. GlaxoSmithKline has also targeted between 1 billion pounds and 2 billion pounds of share buybacks this year to lift shareholder returns.

Prospective dividends for this year and next carry yields of 4.6% and 4.9%, far in excess of a forward dividend yield forecast of 2.4% for the entire pharmaceuticals and biotechnology sector, and above the FTSE 100's 3.3% reading.

GlaxoSmithKline was recently dealing on a P/E ratio of 14.6 and 13.5 for 2013 and 2014, respectively, providing a massive discount to a prospective earnings multiple of 48 for the U.K.'s listed pharmaceuticals and biotechnology companies. I believe that improving earnings prospects, combined with a robust dividend policy, makes the pharma play an excellent stock pick.

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