Maybe I'm just an optimist, but I believe there may be light at the end of the tunnel. In the last five bear markets, the Dow Jones fell an average 43% from peak to trough. In this slump, it's so far fallen 35%. Factor in the 25% drop in sterling and in dollar terms the FTSE 100 has lost 50%. This suggests we're nearing a floor. Best-of-breed stocks now trade at bargain prices and we could see more falls of up to, say, 20% due to panic-selling.
GlaxoSmithKline (LSE:GSK), rated a BUY by ABN Amro
Yet for the patient investor, I think now is a good time to dip back into the market. GlaxoSmithKline is one lower-risk opportunity. It is the world's fourth-largest drug maker by capitalisation at £65bn. Its top drugs include asthma medication Advair and antibiotic Augmentin. The firm supplies a quarter of the world's vaccines, protecting against illnesses such as diphtheria and typhoid. It also owns a huge consumer healthcare portfolio (15% of revenues) with global brands such as Gaviscon and Ribena.
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The City has fretted in the past about GlaxoSmithKline's exposure to patent expiries. But the group has been investing heavily (£3bn a year) to beef up its pipeline and now has several potential new blockbuster drugs. Around 20 major treatments are in Phase III trials, with 130 other promising early-stage compounds under review. This should offset sales lost to generic competition. The City expects 2008 sales and underlying earnings per share (EPS) to be £23.7bn and 101p respectively, rising to £24.1bn and 106p in 2009 with perhaps more profits to come after recent job cuts. The stock is on an undemanding 2008 p/e of 12, pays a 4.7% dividend yield and should benefit from the falling pound; more than 90% of revenues originate outsideBritain. The balance sheet is robust (net debt of £9bn) and it generates £6bn of operating cash flow each year.
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So what are the dangers? There are constant threats from pipeline setbacks, government pricing pressures, generics, product concerns (such as its Avandia diabetes treatment) and potential litigation. But I think these risks have been overplayed. GlaxoSmithKline is well placed to benefit from ageing populations, greater consumption in emerging territories and rising vaccine demand. It's a classic defensive stock that looks too cheap for such a science-rich megacap.
Recommendation: GOODVALUE at £11.90
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.
