Investment Column: Glaxo looks cheap as it turns back to basics
Hochschild Mining; Euromoney
Thursday 22 July 2010
Our view: Buy
Share price: 1186p (+12.5p)
GlaxoSmithKline has become unrecognisable from the company that its chief executive, Andrew Witty, inherited two years ago. The biggest change is the pharmaceuticals giant's approach to its business.
Gone is the emphasis on expensive research into the next blockbuster drug that will cure the ailments of millions and rake in billions for GSK. Instead, the company is much more concerned with its over-the-counter offer of soaps and toothpastes, with a particular bent towards the emerging markets. Lucozade, we hear, is very popular in China.
Investors, sadly, have not seen the changes replicated in the company's share price, which has grown only marginally in the past year. Yet that doesn't worry us. Indeed, we would be among the first in the queue to pick up GSK shares, which trade on a multiple of just 9.7 times forecast full-year earning and are undervalued. The dividend yield of almost 6 per cent represents a decent return on any investment.
For months now, investors have shied away from GSK because of concern about the likely ramifications of a US Food and Drug Administration (USFDA) inquiry into the safety of the company's diabetes drug, Avandia. Some patients have claimed it causes heart attacks and strokes but last week the USFDA upheld Avandia's safety record, which should lead to an uptick in sales. GSK recently put aside £1.6bn to settle a range of legal claims, including those relating Avandia, which means that to a large extent it has cleared the decks in terms of its liabilities.
Announcing yesterday's second-quarter numbers, GSK said it might start a shares buyback programme, which could help the price. GSK has ruled itself out of any bidding war for the Durex maker SSL, which yesterday recommended a bid from Reckitt Benckiser. The stars are starting to align for GSK and, at these levels, the shares should not be missed. Buy.
Our view: Buy
Share price: 306.6p (+13.6p)
Yesterday's quarterly production numbers from Hochschild Mining revealed a more-than-healthy 12 per cent rise in silver equivalent ounces (which tots up both gold and silver output) to a total of 6.8 million ounces. That puts the company well on track to hit its annual target of 26.3 million ounce but it wasn't the only plus -point.
The report also suggested that the newly-installed chief executive, Igancio Bustamente, and chief finance director, Ramon Barua, were making headway in dealing with declining mines. They have significantly improved the overall life-of-mines metric, up to 7.9 years from 7.1 years at the end of 2009. Add to this the exploration success at its Azuca site and a massively expanded exploration budget (from $30m last year to $50m in 2010) and Hochschild's prospects look promising.
Goldman Sachs has the company on 12.9 times this year's forecast earnings, dropping to an attractive 6.8 next year. It notes the development of the Azuca and Crespo operations in Peru, coupled with further increases in the resource life of the company's mines. This could fuel the stock, so buy.
Our view: Buy
Share price: 580.5p (-8p)
The publishing industry has not been a great place to be during the downturn, but one business that fared relatively well compared to the rest was Euromoney Institutional Investor.
The business-to-business publisher and events organiser published an update yesterday which revealed that trading was in line with the expectations set out in its interim results. The quarter to the end of June saw revenues increase by 16 per cent to £97.9m, ahead of analysts' expectations, as the events business recovered and the wider advertising market improved.
The group has also been working hard to change its business model over the past few years. Since buying Metal Bulletin magazine and its web portal, Euromoney has been increasing the proportion of revenue brought in from subscriptions, making it less dependent on the advertising which crumbled so completely during the recession.
Subscriptions now make up just under half of the total revenues and Euromoney revealed yesterday that revenues were up 4 per cent during the quarter. The move online has also proved easier to capitalise on for a business-to-business company than more consumer-focused plays.
Euromoney was not immune to the downturn but cost-cutting helped it to maintain margins and Investec has the stock on an undemanding 11.9 times forecast full-year earnings. Management have voiced concerns about uncertainties but Euromoney has shown it can trade through them. Buy.
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