Head To Head: GlaxoSmithKline vs AstraZeneca

Published in Investing on 4 September 2012

Which pharmaceuticals giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are pharma giants GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN).

Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including the big drugs groups.

The shares of GlaxoSmithKline and AstraZeneca have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 3%, but Glaxo is up 3% and Astra has risen 5%.

Let's take our seats at ringside.

Round 1: earnings

Recent share price1,433p2,937p
Last year price-to-earnings (P/E) ratio12.66.3
Current year forecast P/E12.37.9
Four-year average earnings per share (eps) growth (%)1914
Current year forecast eps growth (%)2-19
Forecast operating margin (%)2930

Source: Digital Look. Winners in bold.

Astra takes points for an eye-catching 'value' P/E rating, while Glaxo scores for superior earnings growth. Strictly speaking, Astra wins the round on forecast operating margin, but it's such a close call that it would be splitting hairs to declare the round anything other than a draw.

Round 2: dividends

Last year dividend yield (%)4.96.0
Current year forecast dividend yield (%)4.26.2
Four-year average dividend growth (%)711
Current year forecast dividend growth (%)64
Forecast dividend cover1.62.0

Source: Digital Look. Winners in bold.

Glaxo's dividend yield, growth and cover are very decent, but Astra trumps its rival on almost every point. Only on current year forecast dividend growth does Glaxo sneak a consolation point.

Round 3: balance sheet

Price-to-book (P/B) ratio8.02.5
Net gearing (%)1148

Source: Digital Look. Winners in bold.

Astra hammers Glaxo in the final round, giving it two winning rounds and one draw. Astra takes eight points, Glaxo three, and one point is shared.

Post-match assessment

On the face of it, this was a comfortable win for Astra. However, the striking negative earnings growth forecast for the current year (-19%) points to a problem that eclipses all the positives in the eyes of many investors.

Patent protection for some of Astra's best-selling drugs expires in the next few years. It's a problem other big pharma groups are also facing -- but not to the same extent as Astra.

In my view, though, as a general rule of thumb, when the market is pessimistic about a company, the pessimism is often overdone; conversely, when the market is optimistic, the optimism is often overdone.

On this basis, it seems to me there's a good chance that there's more than enough pessimism in unloved Astra's current rating and that the company's value credentials could handsomely reward patient investors in the long run.

Big pharma groups are among the largest holdings of top City investor Neil Woodford, the man whose funds have outperformed the market by more than 300% over the past 15 years.

You can learn about Woodford's enormously successful investing strategy and the other dividend-paying blue chips he currently favours in an exclusive Motley Fool report, “8 Shares Held By Britain's Super Investor”. The report is free to download right now, simply by clicking here.

Investing is by no means easy in today's uncertain economy. That's why we've published “Top Sectors Of 2012” – our guide to three favourable industries. This free report will be dispatched immediately to your inbox.

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> G A Chester owns does not own shares in any of the companies mentioned in this article.

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AleisterCrowley 04 Sep 2012 , 1:59pm

Well, I've got both ! I've never been able to decide which one to dump.....

trmeer 04 Sep 2012 , 2:26pm

I hold both as well, both look like great long term high income holds. Planning to add to my AZN when the price comes down more.

sludgesifter 04 Sep 2012 , 7:12pm

What worries the market is that the chemistry gets ever more complex as new drugs must attain ever higher standards to surpass the proven efficacy and safety of established ones. Meanwhile the pharmaceutical companies are not being allowed longer patents to compensate for the increasingly onerous, protracted, and costly development and testing phase of the drug cycle. Something will have to give in the end,and it may be that the weaker companies will just implode, leaving the stronger ones to pick up the pieces. Glaxo is the more likely survivor of the two, while Astra should be valued as a declining income stream with a finite horizon.

goodlifer 04 Sep 2012 , 7:33pm

" Glaxo is the more likely survivor of the two."


Clitheroekid 04 Sep 2012 , 8:48pm

Just as a matter of idle curiosity, does anyone know why both companies have such heavyweight share prices?

Most companies who have four figure price tags like these split the shares at some point in the (as I understand it) belief that it makes the shares more `marketable', though the logic escapes me.

If AZN's propsects are as relatively poor as the price indicates what are the prospects of them being taken over, and at what sort of price? If there was a reasonable prospect it would tend to underpin the price and might just be the spur I needed to buy some of that juicy yield.

goodlifer 05 Sep 2012 , 7:57am

I've wondered about that too.

It may be because the availability today of calculators makes it less necessary to use convenient numbers - everything now seems to cost something.99, which would be a nightmare if you had to work it out manually.

sludgesifter 05 Sep 2012 , 8:29am

Goodlifer: The market assigns a much higher P/E to Glaxo. Who am I to gainsay that? Glaxo has a better track record than Astra in being able to push its patent cliff further into the future. Also, Glaxo is hedging its bets by maintaining consumer brands of extraordinary longevity and profitability. Sorry---I don't have any information that isn't already well known.

goodlifer 05 Sep 2012 , 1:08pm

Thanks sludgesifter
"TThe market assigns a much higher P/E to Glaxo. Who am I to gainsay that?."

There's sometimes something to be said for a nice low PE.

atilliator 06 Sep 2012 , 9:52am

Like others, I couldn't decide which to buy, so I bought both. The divis of both yield more than you will get on the High Street.

M0byDick 06 Sep 2012 , 10:03am

Hi guys -- if you hold both GSK and AZN you're in good company: a lot of shrewd investors -- Buffett and Woodford to name two ;) -- have spread their bets in the pharma sector. The strength of different companies' drugs pipelines do change over time and where future blockbusters will emerge from isn't exactly predictable, so hedging your bets in this sector could be quite a good strategy.
Foolish best
MobyDick (G A Chester -- article author)

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