Has GlaxoSmithKline plc (GSK) Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock, then decide if GlaxoSmithKline plc (NYSE:GSK) fits the bill.

GlaxoSmithKline plc (ADR) (NYSE:GSK)The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let’s take a closer look at GlaxoSmithKline.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 3.1% Fail
1-year revenue growth > 12% (3.5%) Pass
Margins Gross margin > 35% 70.1% Pass
Net margin > 15% 17.3% Pass
Balance sheet Debt to equity < 50% 271.3% Fail
Current ratio > 1.3 0.99 Fail
Opportunities Return on equity > 15% 60.9% Pass
Valuation Normalized P/E < 20 17.98 Pass
Dividends Current yield > 2% 5% Pass
5-year dividend growth > 10% 7.3% Fail
Total score 5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at GlaxoSmithKline last year, the company gained back the point it lost from 2011 to 2012, as net margins rose. But the stock has been stuck in the doldrums, roughly unchanged over the past year.

The big news for Glaxo this year is that it finally managed to buy out longtime target Human Genome Sciences. By raising its bid slightly, Glaxo was able to avoid a potential bidding war with Celgene Corporation (NASDAQ:CELG) and acquire the rights to promising lupus drug Benlysta, with which it had worked for years alongside Human Genome Sciences as a marketing partner. It also picked up some other promising drug candidates in late-stage trials as well.

But Benlysta could see further competition in the near future. Eli Lilly & Co. (NYSE:LLY) recently decided to drop development of its tabalumab drug for rheumatoid arthritis, but the company still hopes the drug can become a viable treatment for lupus.

That has Glaxo looking for new growth opportunities. Emerging markets are one prospect, and last month, Glaxo announced a joint venture with an Indian company specializing in vaccines to develop an all-purpose vaccine against polio and other deadly diseases like hepatitis B and whooping cough. In addition, its COPD treatment LAMA/LABA, which it licenses from Theravance Inc (NASDAQ:THRX) , could be a strong successor to Glaxo’s Advair, which has come off-patent and now has Teva Pharmaceutical Industries Ltd (NYSE:TEVA) looking to produce a generic version to compete.

With six drugs under review in 2013, including treatments for HIV, skin cancer, and type 2 diabetes, this year will be pivotal for Glaxo. If the pipeline can lead to more approvals, then Glaxo could finally break out of its long share-price slump and move higher.

For Glaxo to improve, it needs to get sales moving in the right direction and work on strengthening its balance sheet. If Europe turns around, then Glaxo will be in a strong position to take advantage and move close to perfection.

The article Has GlaxoSmithKline Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!