Surprising reaction to GSK Q3 results today

Wednesday, Oct 25 2017 by

I returned to my computer after the market was closed to see reasonably positive headlines on the business news sites accompanying GSK's 3rd quarter results. Expecting to see the share price little change I was amazed to see it had fallen almost 6%! For a mega cap stock which would fit into Ben Hobson's definition of low beta this is an extreme reaction and represents a bigger fall than Unilever and Reckitts warned on sales last week. GSK said that sales and profits were on track so what has gone wrong or has the market over-reacted as it definitely very skittish at the moment. Witness the punitive reaction to any earnings miss in small cap even when they are quite modest shortfalls.

As the trading, sales and profits are largely in line with expectations if not slightly better I think the market is worried about the cash flow and dividends. Like the major oil companies this is one of the most widely held income shares in the UK and any threat to the dividend payout will panic the market. The new CEO is obviously aware of the issue as she says that 'cash flow generation continues to improve' but she is also trying to rebase the business by focusing more on its drug portfolio and becoming less of a sprawling conglomerate.

Recently, Neil Woodford who had been a long term holder sold his holding citing the threat to the dividend as well as the refusal of the company to demerge its business so it could realise value to shareholders by becoming more than the sum of its parts. Given his recent track record his sale could be a good contrary indicator but it does underline the market's thinking on the stock. The management is caught between a rock and a hard place. To improve the quality and success of the drug portfolio, as the new CEO wants, it will have to invest heavily in R&D but by doing it will eat into valuable free cash flow and threaten the dividend. By not investing the company will fall behind its competition and rapidly become even more ex-growth.

The FCF in the first 9 months will require strong generation in the final quarter to cover the dividend but the payment appears safe for the time being based on the management comments and trading performance to date. As the major oils have proved the behemoth stocks have considerable scope to cut costs and a couple of years ago there were many (including Woodford again) who believed it was only a matter of time until Shell and BP cut their dividends in response to the low oil price. Although there has been a partial recovery in the oil price the main reason they were not cut is that costs were aggressively cut and great importance was attached to the maintenance of the payout. It is likely that the GSK management will think along similar lines while at the same time trying to rebalance the underlying business.

On balance I think the fall today is overdone. The stock has been range bound between about £14-£17 for about 5 years with occasional dips above and below and is now at the bottom end of the range. The share is also a good hedge against the UK economy and a negative Brexit outcome as well as benefiting from sterling's fall. The weakness today was probably compounded by the stronger than expected GDP numbers for the UK which increased expectations of a rate rise. GSK with its high but fixed yield has bond like qualities and other bond proxies, such as utilities, were also weak today. As long as you think the dividend is safe the shares are attractive at these levels.


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GlaxoSmithKline plc is a global healthcare company. The Company operates through three segments: Pharmaceuticals, Vaccines and Consumer Healthcare. The Company focuses on its research across six areas: Respiratory diseases, human immunodeficiency virus (HIV)/infectious diseases, Vaccines, Immuno-inflammation, Oncology and Rare diseases. The Company makes a range of prescription medicines, vaccines and consumer healthcare products. The Pharmaceuticals business discovers, develops and commercializes medicines to treat a range of acute and chronic diseases. The Vaccines business provides vaccines for people of all ages from babies and adolescents to adults and older people. The Consumer Healthcare business develops and markets products in Wellness, Oral health, Nutrition and Skin health categories. Its product portfolio includes Adartrel, Bexsero, Daraprim and Quinvaxem. Its brands include Panadol, abreva, polident and physiogel. more »

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4 Posts on this Thread show/hide all

Haraldos 27th Oct '17 1 of 4

In uncertain times, as we are now in, many investors sentiments are unnecessarily amplified. Good feed information.

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hayashi22 27th Oct '17 2 of 4

I think there is growing awareness that the ceo is useless-a token gesture appointment.

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tscott 27th Oct '17 3 of 4

Whether she is useless or not the market has certainly given its verdict about her comments regarding the possible acquisition of healthcare businesses from US pharma companies which may have to be financed by cutting the dividend. This should give her and the Board pause for thought with regard to her strategy going forward as well as underlining the importance of the dividend.

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andrea34l 27th Oct '17 4 of 4

The summary from Investors Chronicle on GSK is as follows:

News that US pharmaceutical giant Pfizer is planning to sell its consumer healthcare division and that GlaxoSmithKline (GSK) may decide to buy it, overshadowed the latter’s third-quarter results. Investors have previously criticised the UK group for prioritising toothpaste over potentially life-saving medicine and seemed unimpressed when chief executive Emma Walmsley confirmed her interest in building up its consumer business.

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