February 5, 2015 NYSE: GSK GLAXOSMITHKLINE PLC BUY A+ A A- HOLD B+ B Annual Dividend Rate $2.65 B- C+ C Annual Dividend Yield 5.89% SELL C- D+ Beta 0.60 Sector: Health Care GSK BUSINESS DESCRIPTION GlaxoSmithKline plc creates, discovers, develops, manufactures, and markets pharmaceutical products, such as vaccines, over-the-counter medicines, and health-related consumer products worldwide. D D- E+ E E- F Market Capitalization $220.9 Billion Sub-Industry: Pharmaceuticals Weekly Price: (US$) SMA (50) HOLD 52-Week Range $41.25-$56.73 RATING SINCE 02/05/2015 Price as of 2/4/2015 $44.95 Source: S&P SMA (100) 1 Year 2 Years 56 54 52 50 STOCK PERFORMANCE (%) 3 Mo. Price Change -1.34 1 Yr. -11.69 3 Yr (Ann) 0.07 Last Qtr -43.69 -64.29 -63.75 12 Mo. -24.13 -52.35 -51.91 3 Yr CAGR -6.79 -19.32 -18.00 RETURN ON EQUITY (%) GSK Q4 2014 64.64 Q4 2013 77.69 Q4 2012 77.43 Ind Avg 10.74 20.21 20.27 S&P 500 14.59 13.97 13.23 48 46 GROWTH (%) Revenues Net Income EPS 44 42 Rating History BUY Volume in Millions 40 20 2013 2014 2015 0 COMPUSTAT for Price and Volume, TheStreet Ratings, Inc. for Rating History P/E COMPARISON RECOMMENDATION We rate GLAXOSMITHKLINE PLC (GSK) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and weak operating cash flow. 25.40 34.48 19.27 GSK Ind Avg S&P 500 HIGHLIGHTS The gross profit margin for GLAXOSMITHKLINE PLC is rather high; currently it is at 66.89%. Regardless of GSK's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, GSK's net profit margin of 18.43% compares favorably to the industry average. 2012 2013 Q4 0.62 Q2 0.48 GSK, with its decline in revenue, underperformed when compared the industry average of 15.2%. Since the same quarter one year prior, revenues fell by 43.7%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share. Q3 0.21 Q1 0.46 Q4 1.71 Q3 0.71 Q2 0.65 Q1 0.61 Q4 0.57 Q3 0.77 Q2 0.75 Q1 0.83 EPS ANALYSIS¹ ($) Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, GLAXOSMITHKLINE PLC's return on equity significantly exceeds that of both the industry average and the S&P 500. 2014 NA = not available NM = not meaningful 1 Compustat fiscal year convention is used for all fundamental data items. The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Pharmaceuticals industry. The net income has significantly decreased by 64.3% when compared to the same quarter one year ago, falling from $4,196.37 million to $1,498.59 million. The debt-to-equity ratio is very high at 4.41 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2015. All rights reserved. Report Date: February 5, 2015 PAGE 1 February 5, 2015 NYSE: GSK GLAXOSMITHKLINE PLC Sector: Health Care Pharmaceuticals Source: S&P Annual Dividend Rate $2.65 Annual Dividend Yield 5.89% PEER GROUP ANALYSIS Beta 0.60 Market Capitalization $220.9 Billion 52-Week Range $41.25-$56.73 Price as of 2/4/2015 $44.95 INDUSTRY ANALYSIS US pharmaceutical companies are involved in the discovery, manufacturing, distribution, and research of generic and branded drugs. The industry accounts for 27.3% of the healthcare sector and is capital-intensive with exorbitant R&D costs. Most companies are mature and characterized by high margins and higher dividend pay-outs. Major players include Pfizer (PFE), Bristol-Myers Squibb (BMY), Abbott Laboratories (ABT), and Eli Lilly (LLY). The industry employs more than 400,000 in the US. The 50 largest companies control over 80% of the market. 60% REVENUE GROWTH AND EBITDA MARGIN* ACT V FA AB OR AZN R VO FA LE AB -30% UN Revenue Growth (TTM) LE The industry faces unprecedented challenges from stringent environmental regulations and patent expirations on billion-dollar products. Industry experts believe that generic competition will wipe out more than $60 billion from US industry sales over the next five years as more than three dozen drugs lose patent protection. Merck lost a $3 billion patent protection for its osteoporosis drug Fosamax in 2008 while Eli Lilly lost an estimated 90% of Zyprexa sales. The FDA is rejecting more drugs on safety concerns and a lack of compelling evidence of definite advancement from existing drugs. 27.5% 31.5% EBITDA Margin (TTM) Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates. Companies for this scatter plot have a market capitalization between $70.9 Billion and $283.7 Billion. Companies with NA or NM values do not appear. *EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization. Horizontal and vertical integration has created health maintenance organizations (HMOs) and pharmacy benefit management firms (PBMs). In order to cut costs and remain competitive, the US pharma majors have been outsourcing research to low-cost service providers in India and China. The promising era of personalized medicine has begun. Dozens of exciting new drugs for the treatment of dire diseases such as cancer, AIDS, Parkinson's, and Alzheimer's are either on the market or are very close to regulatory approval. The industry has shifted its focus from blockbuster drugs (chemistry-based drugs) to specialized products, geared towards specific disorders. According to government estimates, American drug purchases may reach $497 billion by 2016, supported by a rapidly aging population, inflation, and the introduction of expensive new drugs. 60% REVENUE GROWTH AND EARNINGS YIELD The industry depends on federal subsidies for cost reductions. The US government enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in 2003 to provide prescription drug benefits to the elderly and disabled. Medicare Part D, a component of MMA, which came into effect in 2006, altered the revenue model of pharma companies. Revenue from such programs is expected to reach $724 billion by 2015 as federal subsidies will lower co-payments and deductibles for specialty drugs. ACT V FA PEER GROUP: Pharmaceuticals AB OR R VO FA LE AB -30% UN Revenue Growth (TTM) LE AZN -2% ABBV JNJ NVS SNY MRK NVO PFE LLY GSK 7% Earnings Yield (TTM) Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. Companies for this scatter plot have revenue growth rates between -24.1% and 54.1%. Companies with NA or NM values do not appear. Ticker GSK NVO ABBV AZN LLY ACT JNJ NVS PFE MRK SNY Company Name GLAXOSMITHKLINE PLC NOVO NORDISK A/S ABBVIE INC ASTRAZENECA PLC LILLY (ELI) & CO ACTAVIS PLC JOHNSON & JOHNSON NOVARTIS AG PFIZER INC MERCK & CO SANOFI Recent Price ($) 44.95 43.22 56.91 71.06 70.22 266.23 101.36 98.15 32.07 59.05 47.00 Market Cap ($M) 220,899 91,305 90,673 89,764 78,185 70,855 283,718 265,613 202,062 168,344 124,736 Price/ Earnings 25.40 26.35 52.21 87.73 31.49 NM 17.78 22.72 22.58 14.40 23.50 Net Sales TTM ($M) 35,231.21 14,432.02 19,960.00 27,157.00 19,615.60 11,784.70 74,331.00 52,419.00 49,605.00 42,237.00 43,871.29 Net Income TTM ($M) 4,293.30 4,303.48 1,774.00 1,030.00 2,390.50 -1,046.00 16,323.00 10,210.00 9,136.00 11,920.00 5,372.79 The peer group comparison is based on Major Pharmaceuticals companies of comparable size. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2015. All rights reserved. Report Date: February 5, 2015 PAGE 2 February 5, 2015 NYSE: GSK GLAXOSMITHKLINE PLC Sector: Health Care Pharmaceuticals Source: S&P Annual Dividend Rate $2.65 Annual Dividend Yield 5.89% COMPANY DESCRIPTION GlaxoSmithKline plc creates, discovers, develops, manufactures, and markets pharmaceutical products, such as vaccines, over-the-counter medicines, and health-related consumer products worldwide. The company provides pharmaceutical products in various therapeutic areas, such as respiratory, anti-virals, central nervous system, cardiovascular and urogenital, metabolic, antibacterials, oncology and emesis, dermatology, rare diseases, immuno-inflammation, vaccines, and HIV. It also offers consumer health products in total wellness, oral care, nutritional, and skin health areas. The company's total wellness products comprise Panadol for the treatment of headache and joint pain, fever, and cold symptoms; NicoDerm, NiQuitin CQ, and Nicabate for the treatment of nicotine withdrawal as an aid to quitting smoking; and ENO Tums, a rapid relief antacid. Its oral care products include Sensodyne for the prevention of dental sensitivity; Polident, Poligrip, and Corega to enhance comfort of fitted dentures and to clean dentures; Aquafresh for the prevention of caries, gum disease, and bad breath; and Parodontax to help stop bleeding gums and gum health. The company's nutrition products comprise Horlicks and Maxinutrition for nutrition; and skin health products include Physiogel, a face and body care product for dry, sensitive, and irritated skin, and Oilatum, a soothing treatment for eczema and dry skin conditions. In addition, it provides prescription medicines; and paediatric and adult vaccines against various infectious diseases. The company has a strategic cancer immunotherapy collaboration with Adaptimmune Limited to develop and commercialize NY-ESO-1 clinical cancer program. GlaxoSmithKline plc was founded in 1935 and is headquartered in Brentford, the United Kingdom. GLAXOSMITHKLINE PLC 980 Great West Road Brentford TW89GS GBR Phone: 44 20 8047 500 http://www.gsk.com Employees: 99000 Beta 0.60 Market Capitalization $220.9 Billion 52-Week Range $41.25-$56.73 Price as of 2/4/2015 $44.95 STOCK-AT-A-GLANCE Below is a summary of the major fundamental and technical factors we consider when determining our overall recommendation of GSK shares. It is provided in order to give you a deeper understanding of our rating methodology as well as to paint a more complete picture of a stock's strengths and weaknesses. It is important to note, however, that these factors only tell part of the story. To gain an even more comprehensive understanding of our stance on the stock, these factors must be assessed in combination with the stock’s valuation. Please refer to our Valuation section on page 5 for further information. FACTOR SCORE 1.0 Growth out of 5 stars weak Measures the growth of both the company's income statement and cash flow. On this factor, GSK has a growth score better than 10% of the stocks we rate. strong 2.0 Total Return out of 5 stars weak Measures the historical price movement of the stock. The stock performance of this company has beaten 30% of the companies we cover. strong 5.0 Efficiency out of 5 stars weak Measures the strength and historic growth of a company's return on invested capital. The company has generated more income per dollar of capital than 90% of the companies we review. strong 1.5 Price volatility out of 5 stars weak Measures the volatility of the company's stock price historically. The stock is less volatile than 20% of the stocks we monitor. strong 2.0 Solvency out of 5 stars weak Measures the solvency of the company based on several ratios. The company is more solvent than 30% of the companies we analyze. strong 5.0 Income out of 5 stars weak Measures dividend yield and payouts to shareholders. The company's dividend is higher than 90% of the companies we track. strong THESTREET RATINGS RESEARCH METHODOLOGY TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's performance. These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2015. All rights reserved. Report Date: February 5, 2015 PAGE 3 February 5, 2015 NYSE: GSK GLAXOSMITHKLINE PLC Sector: Health Care Pharmaceuticals Source: S&P Annual Dividend Rate $2.65 Annual Dividend Yield 5.89% Consensus EPS Estimates² ($) IBES consensus estimates are provided by Thomson Financial Beta 0.60 Market Capitalization $220.9 Billion 52-Week Range $41.25-$56.73 Price as of 2/4/2015 $44.95 FINANCIAL ANALYSIS GLAXOSMITHKLINE PLC's gross profit margin for the fourth quarter of its fiscal year 2014 is essentially unchanged when compared to the same period a year ago. Sales and net income fell significantly; although net income growth outperformed the average competitor in its industry, revenue growth did not. At the same time, stockholders' equity ("net worth") has significantly decreased by 42.73% from the same quarter last year. 20.00 95.86 E 96.49 NA 2015(E) NA STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12-months. To learn more visit www.TheStreetRatings.com. INCOME STATEMENT Net Sales ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil) Q4 FY14 8,127.59 NA 1,563.66 1,498.59 Q4 FY13 14,433.28 NA 4,530.45 4,196.37 Q4 FY14 6,865.22 63,326.13 29,261.72 6,640.90 Q4 FY13 9,281.44 69,753.34 30,239.26 11,596.83 Q4 FY14 66.89% NA 19.24% 0.56 6.77% 64.64% Q4 FY13 70.12% NA 31.39% 0.67 12.91% 77.69% Q4 FY14 1.10 0.82 NA NA Q4 FY13 1.11 0.72 NA NA Q4 FY14 2,406 0.61 0.62 2.76 NA 3,908,850 Q4 FY13 2,396 0.62 1.71 4.84 NA 4,965,055 BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil) PROFITABILITY Gross Profit Margin EBITDA Margin Operating Margin Sales Turnover Return on Assets Return on Equity DEBT Current Ratio Debt/Capital Interest Expense Interest Coverage SHARE DATA Shares outstanding (mil) Div / share EPS Book value / share Institutional Own % Avg Daily Volume 2 Sum of quarterly figures may not match annual estimates due to use of median consensus estimates. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2015. All rights reserved. Report Date: February 5, 2015 PAGE 4 February 5, 2015 NYSE: GSK GLAXOSMITHKLINE PLC Sector: Health Care Pharmaceuticals Source: S&P Annual Dividend Rate $2.65 Annual Dividend Yield 5.89% RATINGS HISTORY Our rating for GLAXOSMITHKLINE PLC was downgraded from Buy to Hold today. As of 2/4/2015, the stock was trading at a price of $44.95 which is 20.8% below its 52-week high of $56.73 and 9.0% above its 52-week low of $41.25. HOLD: $44.95 BUY: $45.68 2 Year Chart Market Capitalization $220.9 Billion Price/Earnings 1 2 3 premium $55 $50 52-Week Range $41.25-$56.73 4 5 GSK 25.40 Peers 34.48 • Discount. A lower P/E ratio than its peers can signify a less expensive stock or lower growth expectations. • GSK is trading at a significant discount to its peers. Price/Projected Earnings From Buy Buy To Hold Buy RATINGS DEFINITIONS & DISTRIBUTION OF THESTREET RATINGS (as of 2/4/2015) 47.33% Buy - We believe that this stock has the opportunity to appreciate and produce a total return of more than 10% over the next 12 months. 29.84% Hold - We do not believe this stock offers conclusive evidence to warrant the purchase or sale of shares at this time and that its likelihood of positive total return is roughly in balance with the risk of loss. 22.83% Sell - We believe that this stock is likely to decline by more than 10% over the next 12 months, with the risk involved too great to compensate for any possible returns. Research Contact: 212-321-5381 Sales Contact: 866-321-8726 2 3 premium Price reflects the closing price as of the date listed, if available TheStreet Ratings 14 Wall Street, 15th Floor New York, NY 10005 www.thestreet.com 1 4 5 1 2 3 premium 4 5 Price/Sales 1 2 premium 3 4 5 Price to Earnings/Growth 4 5 discount 1 2 3 premium 4 5 discount GSK 0.01 Peers 0.96 • Discount. The PEG ratio is the stock’s P/E divided by the consensus estimate of long-term earnings growth. Faster growth can justify higher price multiples. • GSK trades at a significant discount to its peers. Earnings Growth 1 2 3 4 lower 5 higher GSK -51.91 Peers 15.65 • Lower. Elevated earnings growth rates can lead to capital appreciation and justify higher price-to-earnings ratios. • However, GSK is expected to significantly trail its peers on the basis of its earnings growth rate. Sales Growth discount GSK 3.07 Peers 6.37 • Discount. In the absence of P/E and P/B multiples, the price-to-sales ratio can display the value investors are placing on each dollar of sales. • GSK is trading at a significant discount to its industry on this measurement. 3 GSK 13.41 Peers 22.99 • Discount. The P/CF ratio, a stock’s price divided by the company's cash flow from operations, is useful for comparing companies with different capital requirements or financing structures. • GSK is trading at a significant discount to its peers. discount GSK 16.28 Peers 8.45 • Premium. A higher price-to-book ratio makes a stock less attractive to investors seeking stocks with lower market values per dollar of equity on the balance sheet. • GSK is trading at a significant premium to its peers. 2 premium discount GSK 0.47 Peers 17.97 • Discount. A lower price-to-projected earnings ratio than its peers can signify a less expensive stock or lower future growth expectations. • GSK is trading at a significant discount to its peers. Price/Book 1 Price/CashFlow discount 2014 MOST RECENT RATINGS CHANGES Date Price Action 2/4/15 $44.95 Downgrade 2/1/13 $45.68 No Change Price as of 2/4/2015 $44.95 VALUATION HOLD. The current P/E ratio indicates a discount compared to an average of 34.48 for the Pharmaceuticals industry and a premium compared to the S&P 500 average of 19.27. For additional comparison, its price-to-book ratio of 16.28 indicates a significant premium versus the S&P 500 average of 2.72 and a significant premium versus the industry average of 8.45. The price-to-sales ratio is well above the S&P 500 average, but well below the industry average. The valuation analysis reveals that, GLAXOSMITHKLINE PLC seems to be trading at a discount to investment alternatives within the industry. $60 $45 2013 Beta 0.60 1 2 3 lower 4 5 higher GSK -24.13 Peers 7.73 • Lower. A sales growth rate that trails the industry implies that a company is losing market share. • GSK significantly trails its peers on the basis of sales growth DISCLAIMER: The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but TheStreet Ratings cannot guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided via the COMPUSTAT® Xpressfeed product from Standard &Poor's, a division of The McGraw-Hill Companies, Inc., as well as other third-party data providers. TheStreet Ratings is a division of TheStreet, Inc., which is a publisher. This research report contains opinions and is provided for informational purposes only. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in this report constitutes, or is intended to constitute a recommendation by TheStreet Ratings of any particular security or trading strategy or a determination by TheStreet Ratings that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Your use of this report is governed by TheStreet, Inc.'s Terms of Use found at http://www.thestreet.com/static/about/terms-of-use.html. This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither TheStreet Ratings nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of TheStreet Ratings. Copyright(c) 2006-2015. All rights reserved. Report Date: February 5, 2015 PAGE 5
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