Sell AstraZeneca / Buy GlaxoSmithKline
Today, we are recommending our clients to sell AstraZeneca (“Astra”) and switch into GlaxoSmithKline (“Glaxo”).
AstraZeneca has had a good run as late, rising from 2792p to its current 3024p share price in just two months (a 8.3% gain). Though we originally switched from Glaxo into Astra, this call has not performed as we would have liked. Poor sales in Europe, falling drug prices and a shift to lower-cost generics have not been kind to the company’s share price. With that, J.P.Morgan Cazenove has today reiterated its underweight position with a 2970p price target citing declining earnings for the remainder of the decade on the back of an insufficuient drugs pipeline.The dividend may also be at risk, with the company having recently halted its share buyback ptrogramme prompting talk of a possible “strategic” acquisition.
We are using the low price of Glaxo as an opportunity to buy back in. Though priced on a higher p/e multiple (11.8x vs. 7.9x) and yielding slightly less at 5.5% (vs. 6.1%), we feel its more stable earnings mean a more secure dividend. The company’s growing business in emerging markets and its large consumer healthcare operation are both doing well, both justifying the valuation premium and securing its dividend. The company is also countering the pressure on ‘white pill’ markets in developed economies by restructuring its manufacturing operations, which is forecast to generate £500m of savings by 2015, which comes on top of the £2.5bn of annual savings the company has already found over the last four years.
Most investment banks appear to be more positive on Glaxo than Astra with Deutsche Bank having a price target of 1450p vs. 3000p for Astra. Combined with a solid 5.5% dividend, rising to 5.8% next year, we rate the shares a core holding in everyone’s portfolio.