GlaxoSmithKline plc (ADR) (GSK): Is The Stock A Buy, Sell Or A Hold?

LONDON — I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now, I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins;

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

4. Valuation: an under-rated share price.

A look at GlaxoSmithKline plc (ADR) (NYSE:GSK)
Today I’m evaluating GlaxoSmithKline plc (ADR) (NYSE:GSK), a British global pharmaceutical company, which currently trades at 1550 pence. Here are my thoughts:

GlaxoSmithKline plc (ADR) (NYSE:GSK)

1. Financial strength: The company is in solid financial health with net debt of only 2 times operating profits and interest obligations covered a comfortable 10 times. Also, the company is a cash machine and consistently converts 17% of revenues into free cash flow yearly. Over the past three years, free cash flow has averaged more than 4 billion pounds per year.

2. Profitability: In the last 10 years, revenues per share and earnings-per-share growth have barely outpaced inflation compounding by 4% and 3% per year, respectively, but dividends per share growth has been solid at 7% per year. Operating margins have been consistently around 30% while the 10-year average return on equity has been a remarkable 70% per year.

3. Management: Sir Andrew Witty succeeded Dr. Jean-Pierre Garnier as the company’s CEO in May 2008. Under his leadership, the company has returned a total of 25 billion pounds to shareholders through dividends and share buybacks, improved R&D returns from 11% in 2010 to 12% in 2012, and generated cost-savings of 2.5 billion pounds annually.

4. Long-term prospects: GlaxoSmithKline plc (ADR) (NYSE:GSK) is one of the largest pharmaceutical companies in the world with a market capitalization of 76 billion pounds and annual revenues of 26 billion pounds. For the past five years, to mitigate the effects of the patent cliff and global financial crisis, the company shifted its focus into higher growth areas like biopharmaceuticals, vaccines, consumer health care, and emerging markets while restructuring its U.S. and European operations. Although the U.S. and Europe still account for the bulk of the company’s revenues, at 32% and 28%, respectively, sales from Japan, Latin America and Asia-Pacific now account for 40% of the total group revenues.