GlaxoSmithKline Stock – GlaxoSmithKline PLC Stock Appears To Be Modestly Undervalued
– By GF Value
The stock of GlaxoSmithKline PLC (NYSE:GSK, 30-year Financials) is believed to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $38.9 per share and the market cap of $97.9 billion, GlaxoSmithKline PLC stock is believed to be modestly undervalued. GF Value for GlaxoSmithKline PLC is shown in the chart below.
Because GlaxoSmithKline PLC is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 3.5% over the past three years and is estimated to grow 3.00% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. GlaxoSmithKline PLC has a cash-to-debt ratio of 0.18, which which ranks worse than 82% of the companies in Drug Manufacturers industry. The overall financial strength of GlaxoSmithKline PLC is 4 out of 10, which indicates that the financial strength of GlaxoSmithKline PLC is poor. This is the debt and cash of GlaxoSmithKline PLC over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. GlaxoSmithKline PLC has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $42.8 billion and earnings of $2.717 a share. Its operating margin is 13.24%, which ranks better than 68% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks the profitability of GlaxoSmithKline PLC at 7 out of 10, which indicates fair profitability. This is the revenue and net income of GlaxoSmithKline PLC over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of GlaxoSmithKline PLC is 3.5%, which ranks in the middle range of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth is 17.3%, which ranks better than 70% of the companies in Drug Manufacturers industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, GlaxoSmithKline PLC’s ROIC was 5.50, while its WACC came in at 4.20. The historical ROIC vs WACC comparison of GlaxoSmithKline PLC is shown below:
In short, GlaxoSmithKline PLC (NYSE:GSK, 30-year Financials) stock appears to be modestly undervalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks better than 70% of the companies in Drug Manufacturers industry. To learn more about GlaxoSmithKline PLC stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.