Q4, ANALYSIS:-
During the fourth quarter, GlaxoSmithKline plc (ADR) (NYSE:GSK)’s earnings declined by 36.7%. In addition, revenues of the company also did not exhibit much growth, as they remained flat at around $11 billion. Even though, the company did not exhibit any growth in revenues, nonetheless, the management estimates a marginal increase of 1% in revenues going forward.
In contrast, the management expects to report a core earnings growth of 3% – 4% during the fiscal 2013. This is predominantly due to company’s conscious initiative to control costs, restructure operations and its entire product portfolio.
During the quarter both Pharmaceuticals, Vaccines, and Consumer Healthcare sales were below expectations. Pharmaceutical revenues fell by 1% due to generic competition and price cuts in the EU. Nevertheless, revenues through Vaccines increased by 10% underpinned by a robust performance in the US and the Asia Pacific region.
Within the Consumer Healthcare Business, Oral Care segment reported a growth of 10%, additionally, Nutrition and Skin care segment also increased by 9% and 5% respectively. Although, the growth in the Total Wellness segment surprisingly declined by 12%.
So far the numbers listed are not indicative of a highly optimistic outlook on the company. However, following factors still allow me to keep a bullish view on this stock.
Why investors should consider this GlaxoSmithKline
New products in the pipeline
Over the next three years, GlaxoSmithKline plc (ADR) (NYSE:GSK) has planned to launch 15 new products globally. The successful development and commercialization of these products will bolster the company’s top line in the future.
Cost – Cutting Initiative
GlaxoSmithKline is now relying on cost-cutting initiatives to drive its bottom line. The company plans to focus on restructuring its operations in Europe and improving efficiency in supply, manufacturing and R&D. The program is expected to yield an annual cost saving of at least £1 billion by the end of 2016. I believe, the cost – cutting initiative will facilitate the earnings to grow relatively faster than revenues.
Diversified Base Should Support Revenues
GlaxoSmithKline plc (ADR) (NYSE:GSK) has increased its presence in different regions across the globe in order to diversify its revenue streams. Expansion into Japan and other emerging markets such as India and China should provide new opportunities for growth. Investors should note, during the fiscal 2012, sales from emerging markets grew by 10%. I expect the trend to continue, as the company is expected to further strengthen its presence in the region.
GlaxoSmithKline, increased its stake in the consumer healthcare subsidiary located in India during 2012. The stake was raised from 43.2% to 72.5%, which is indicative of the growth potential in the emerging markets.
Competition from Larger Players in the Industry
GlaxoSmithKline, presently faces a stiff competition for its key drugs such as Valtrex, Lamictal, Imitrex, Requip, Combivir and Epivir. The prime competitors for GlaxoSmithKline plc (ADR) (NYSE:GSK) are large pharmaceutical companies such as; Pfizer Inc. (NYSE:PFE) and The Procter & Gamble Company (NYSE:PG)
Pfizer Inc. (NYSE:PFE) generates highest percentage of its revenues through Diversified Legacy Drugs, at around 29.4%. This is followed by Prevnar & Other Anti-Infective Drugs at around 14%. Further, it also generates 26% of its revenues through Lyrica and Nervous System Drugs and Celebrex Drugs.
Pfizer Inc. (NYSE:PFE) has a market capitalization of $221 billion, and the present stock price is trading very close to its 52-week high. The company reported revenues and gross profit of $59 billion and $48 billion respectively during the fiscal 2012. It is noteworthy that Pfizer operates on an extremely high gross margin of 81%. According the projections offered by Trefis, the FCF-Gross profit % will be around 36% by the end of fiscal 2013.
The revenue contribution through the top line is expected to stay consistently in the range of $17 billion to $19 billion for the next few years. Prevnar Franchise, which offers vaccines for infants holds the second highest revenue share for Pfizer. Presently, Prevnar 7 is approved for infants, however, if Prevnar 13 obtains approval for treating adults, it can then spur a huge growth in overall revenues.
Similarly, GlaxoSmithKline also competes with Procter & Gamble. The Procter & Gamble Company (NYSE:PG) generates highest percentage of its revenues through Home& Pet Care at around 32%, followed by beauty products at 24%. The healthcare division also makes a small contribution of 15% to the overall revenues.
The EBITDA margin for the company declined from 23% during 2011 to 20% in 2012. The healthcare division reported total revenues of $2.5 billion with the EBITDA margin hovering close 20.3% during the same period.
The healthcare division includes three subdivisions; Oral Care, Feminine Care and OTC Drugs. During last two fiscal years, the company has managed to sustain a stable market share of 10% in the global healthcare market primarily due to robust growth of volumes in the emerging economies. Going forward, I expect its market share to grow gradually on the bases of increased traction from the emerging markets.
According to the valuation offered by Trefis, the healthcare division of The Procter & Gamble Company (NYSE:PG)’ accounts for 16% of its stock price. Going forward, sustained increase in the healthcare market share will bolster its bottom line.
Take away
The expected growth in core earnings is predominantly on the grounds of controlled and balanced cost structure, restructuring of operations and a diversified product portfolio. Nonetheless, challenges faced by the company in the form of EU pricing pressure and generic competition could possibly hinder its growth.
I believe with the purposeful intent of expanding into the emerging economies coupled with the cost cutting initiative, will enable investors a higher than expected yield on GlaxoSmithKline plc (ADR) (NYSE:GSK)’s stock in the long run.
The article Cost Cutting Initiative to Bolster GlaxoSmithKline’s Earnings originally appeared on Fool.com and is written by Kiran Gulati.
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