GSK does seem to offer plenty of ripe opportunities. It clearly has a number of drugs far along the research pipeline which is encouraging for future growth. But as the price stands (1601p) this appears to be entirely priced in.
Price to Earnings seems on the money
To begin with the forward P/E predictions seem to show the company is trading at a fair price already. Consensus earnings per share (EPS) figures suggest a P/E ratio of 15.4 for 2014 and 14 for 2015. This does not seem too bad for a company like GSK. What is more, even factoring in the differences in analysts opinions it looks pretty fair:
| EPS | P/E Ratio | |
| 103.86 | 15.41 | |
| High | 110.43 | 14.50 |
| Low | 99 | 16.17 |
| Difference (%) | 11.23 |
Even at their lowest predictions analysts expect GSK to be trading at a P/E ratio of around 16--the historical average of the FTSE 100. What is more, the difference between the highest and lowest EPS predictions (11%) is very narrow indeed showing a great deal of confidence in GSKs ability to hit that sort of EPS range.
The range does widen a little for 2015 but still only to 23% difference (pretty low). And, again, GSKs price seems pretty bang on the money:
| EPS | P/E Ratio | |
| 114.21 | 14.02 | |
| High | 120.6 | 13.28 |
| Low | 97 | 16.51 |
| Difference (%) | 23.34 |
Dividend Cover Possibly a Little Tight
The dividend--a strong attraction of GSK--also looks pretty nice going forward. Analysts expect it to be 81.48 in 2014 and 83.87 in 2015. That is a yield of 5.09% and 5.24%.
The cover for this dividend, however, is a little tight. Assuming the consensus EPS is spot on the cover would be 1.27 times for 2014 and 1.36 times for 2015. With the lowest EPS estimates it is a smaller 1.22 times and 1.16 times.
This is far from ideal but not awful. Even if GSK felt inclined to cut the dividend to 1.3 times the lowest EPS predictions it would register a dividend yield of 74.6p per share which at the 1601p share price would still yield around 4.7% which is still excellent.
Buy or Leave?
I am not sure what to do with GSK. It is neither overpriced or underpriced currently and clearly is set to provide healthy dividends to investors going forward. It is possible that the issues arising from supposed corruption in China will weigh down the price a little further and push it into bargain territory, but equally with the storm clouds passing it is likely that GSKs share price will begin to rise once more and the chance to buy into this income stalwart at a fair price will have passed.
Are you looking to buy into GSK soon or waiting for a potential price drop? Are there any good value pharma alternatives out there?
[Creative Commons image reproduced from Flickr user Ian Wilson (foolstopzanet)]
[Creative Commons image reproduced from Flickr user Ian Wilson (foolstopzanet)]
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