US Edition GlaxoSmithKline
£11.53 -6.5p
Questor says AVOID
GlaxoSmithKlein should be a dead cert buy in the current climate. The twin drivers of the recession, which normally favours pharmaceutical companies, and swine flu, for which GSK has one of the only two recognised antiviral treatments, Relenza, should guarantee investors favourable returns over the medium term.
Shouldn't it? Unfortunately the markets are not so simple.
Since the first signs of the recession appeared in mid-2007 GSK's share price has fallen from near £13 to its current price of £11.53. True, since swine flu appeared in April the shares have rallied, but not strongly enough to suggest investors are buying into the pandemic story, at least in connection to GSK, in any great numbers.
Unfortunately the headline story for GSK remains, as with its peers in the pharmaceutical sector, the concern over revenue growth, or lack of it, as its drugs go off patent.
Any increase in revenue as governments stock up on Relenza and GSK's vaccines is unlikely to swing the pendulum for a company with a multi-billion pound turnover.
For example, in its second-quarter results on Wednesday, GSK revealed that quarterly sales of its flu-related products had more than doubled over the last 12 months.
But this only took total sales to £105m, just a fraction of the company's overall turnover of £6.7bn for the same period.
As another comparator the company said it had lost something like £500m of revenue in the same period from drugs going off patent largely in the US market, by far the company's largest geographical exposure.
The still-relatively-new chief executive Andrew Witty is working hard to diversify GSK's exposure both across geographic and business sectors. The company's consumer health care business which includes Horlicks and Lucozade is doing well with sales up 9pc at £1.2bn, while Mr Witty, whose background includes both African and Asian markets, continues to push ahead with global expansion.
The last time we wrote about GSK in February we advised investors to sell once the shares went ex-dividend later that month. We got it right on that occasion. Since going ex-dividend the price has fallen around 5pc.
For investors looking at GSK, sales growth and income are the keys.
Before Wednesday's market update the stock was yielding 5pc. The company increased that divi by a further 8pc, a healthy and relatively stable return for those looking for income in today's low interest rate environment.
But we think there is unlikely to be much capital appreciation, despite all the noise in connection with swine flu. So unless you are looking for a pure income play, we think GSK is best avoided at present.
Galiform
46½p +9p
Questor says BUY
Questor has said it before but builders’ merchants are not among the most interesting places in the world. However, owning shares in one could yield some interesting results.
Galiform, the owner of the Howden Joinery chain, on Wednesday appeared to confirm a trend that has been slowly building over recent weeks:an improvement in underlying conditions on the high street.
After months of doom and gloom, Marks & Spencer, Next, Wm Morrison and now Galiform have all said recently that sales are less bad than they were.
Galiform has announced that like-for-like sales over recent weeks are 5.2pc lower than last year, compared with down 8.3pc over the six months to June 13. On Wednesday shares increased by 9 to 46½p on the news.
This is not to say that the chain had a great first half of its year. Pre-tax profit fell by 77pc to £4.7m, down from £20.1m last year. However, even this was better than analysts were expecting.
Investec had forecast that the chain would report a full-year pre-tax loss of £6m and the broker noted: “The outlook statement is cautiously optimistic, with the possibility of depot openings later this year.”
So are the shares worth buying? Questor thinks so, even though they have already risen from around 14p at the start of the year in anticipation of the recovery.
Questor last tipped the shares as a buy in September 2008 and sees no reason to change the recommendation.
The chain, which was once the sister chain of MFI before the latter was sold for £1 in 2006, has made progress on cutting net debt and improving its margins. Matthew Ingle, chief executive, said the group was encouraged by “stable” sales throughout the year.
Last autumn the company settled a long-running legal dispute with MFI’s new owners over numerous issues pertaining to the net asset value of MFI when it was sold.
The settlement has removed the prospect of a distracting and expensive court case.
Galiform shares have been hit hard by the credit crunch, along with most of the retail sector but the improvement in share price over recent months suggests that the market has confidence in the retailer. Expansion could be on the cards later this year, a sign of confidence by the management.
The DIY sector is also heavily tied into the housing market. This is set to improve over the next few years, which can only benefit home improvement retailers. Buy.