Investment Column: GSK is healthy, and it's not just the drugs
Unilever; RPS Group
Friday 04 February 2011
Our view: Buy
Share price: 1,168p (+40.5p)
the story of GlaxoSmithKline's annual results is a lesson in the art of managing expectations. The headline figures were less than cheery – the drug maker booked a fourth-quarter loss of 7.5p per share before major restructuring, against forecasts of 6p per share – but the stock firmed up, despite yesterday's falling market.
Though it may seem odd at first, the reaction was down to the fact that the drug-maker had already flagged up a massive £2.2bn fourth-quarter legal charge weeks before the results. Analysts had already run the numbers and were expecting the provision to wipe out the earnings for the three months to December, which it did.
The City was also expecting the charge to push back the resumption of share buybacks. But, the day before the results, GSK unveiled the sale of its stake in quest diagnostics in a cool $1.7bn deal. Soon there was talk that the company could well pull a rabbit out of the hat, and it did, announcing a new long-term share buyback and raising its dividend.
And this isn't mere spin. Few companies can digest a massive legal hit and still resume a buyback. Fewer still can boast of growth in tough markets such as the US. Chief executive Andrew Witty has spent the past couple of years turning GSK into something more than a mere pharma company, making the research and development process more efficient and throwing resources at the consumer arm. These moves promise to keep GSK on a strong footing as the industry deals with growing competition from generics. He deserves credit, as does the stock, which trades on undemanding multiples of about 11 times forward earnings.
The combination of the recent weakness in the share price – it was down nearly 9 per cent over January – the share buyback and the promise of future growth make GSK a solid buy.
Our view: Buy
Share price: 1,837p (-20p)
unilever unveiled an impressive set of full-year results yesterday, although the consumer goods giant raised concerns over rising commodity costs in its fourth quarter. The maker of Hellman's mayonnaise and Domestos bleach booked a 25 per cent rise in pre-tax profits to €6.13bn for the year to 31 December, boosted by underlying volume sales growth of 5.8 per cent.
But it was the fourth quarter that exercised the minds of City scribblers and here messages were mixed. The 5.1 per cent jump in sales volumes in the quarter was comfortably ahead of expectations. But, Unilever also warned its underlying operating margin was down 20 basis points, primarily driven by increased commodity costs. These cost pressures have weighed on Unilever's shares: they came close to £20 at the end of December but dipped again yesterday.
But we feel the sell-off has been overdone and believe that Unilever's overall sales volume growth, particularly a barnstorming 8.8 per cent rise in Asia, Africa and Central and Eastern Europe last year, bodes well for 2011. Its shares trade on a forward earnings multiple of a modest 12.1 and we think the stock is due a rebound. Buy into it.
Our view: Hold off for now
Share price: 214.7p (-1p)
for potential investors in environmental consultancy RPS Group, now is a time for patience. An update from the company forecast full-year results in March in line with expectations. But it also outlined a potentially serious hit to the group's Australian business. The division has already been "seriously disrupted" by the Queensland floods. Although all 900 staff are safe and none of the 11 offices in the region have been directly affected, the result was "significant staff down-time in December". And four RPS offices are directly in the path of Cyclone Yasi, the storm which hit the Queensland coast on Tuesday. The effect cannot yet be quantified.
Analysts are predicting a £5m price tag for RPS from Australia's weather, with reconstruction work and lost time adding up to two months of sales "effectively lost". RPS progressed over the second half of last year, with a boost from buying two energy sector businesses, one in the US, one in the UK. But it started softening from early December, and is off by nearly 5 per cent since January 1. We'd hold off until the impact of Yasi is clear. Then buy cheaply into a company with significant long-term potential that sits on a fair 14 times forecast full year earnings, dropping to 12.5 next year.
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