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Why I think the GSK share price could keep rising in 2020

Roland Head
New year 2020 celebration. Gold foil balloons

2019 has been a good year for GlaxoSmithKline (LSE: GSK) shareholders. As I write, the Glaxo share price is trading at more than 1,800p. That’s 20% higher than at the start of the year.

Chief executive Emma Walmsley has avoided a dividend cut and is rolling out a bold strategic plan to split the company in two. I’ll discuss this more in a moment, but my view is that this plan will cut debt and reward patient shareholders, including me.

In this article I want to explain why I think GlaxoSmithKline shares could keep rising in 2020.

Bold plans

When Walmsley took up the CEO post in 2017, early indications were that she might leave Glaxo’s conglomerate structure untouched. The group’s mix of consumer healthcare and pharmaceuticals has divided investors, with some – notably Neil Woodford – calling for the company to be split.

With hindsight, it now looks as though Walmsley was simply getting her ducks in a row before making a bold move. Rather than simply cutting the company in two, she’s brokered a series of deals that should strengthen both sides of the business before a planned split by 2022.

Getting ready for the split

On the pharma side, this year’s $5.1bn acquisition of oncology specialist Tesaro is expected to contribute to the development of a number of new cancer treatments. GSK is also reporting strong growth in vaccines, with sales of its shingles treatment Shingrix up 87% to £535m during the third quarter.

The group has always had a strong presence in the consumer healthcare market, with products such as Sensodyne and Panadol. But rather than spinning out this business on its own, Walmsley agreed to a joint venture with US pharma giant Pfizer. The two companies have merged their consumer healthcare operations to create a business with market-leading scale.

Consumer healthcare products generally carry attractive profit margins and enjoy stable demand. This generates reliable cash flows. This is expected to allow the new company to take on a big chunk of Glaxo’s £28bn net debt, giving the pharma firm flexibility to invest in its pipeline of new products.

Work is underway to integrate the two consumer businesses. Cost savings of £500m per year are expected by 2022. At this point, Glaxo plans to spin out the new company into a UK stock market listing.

Why I’m a buyer

GlaxoSmithKline shares currently trade on about 15 times forecast earnings, with a dividend yield of 4.5%.

That looks pretty cheap compared to sector rival AstraZeneca, whose shares currently trade on a multiple of 23 times 2020 forecast earnings.

There’s a simple reason for this. After four years of falling profits, AstraZeneca appears poised to return to growth. Analysts expect underlying profit to rise by about 20% next year. In contrast, Glaxo’s earnings are expected to be broadly unchanged in 2020.

In my view, this short-term outlook makes Glaxo the more attractive buy. A lot of growth is already priced into AstraZeneca shares. Any disappointment could hurt. In contrast, Glaxo remains more modestly valued despite this year’s gains. If performance continues to improve, I can see decent upside potential.

I think GSK’s long-suffering shareholders should remain patient. I remain a long-term buyer and will be looking to pick up more shares on any market dips.

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Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019