Stuart Mitchell of S. W. Mitchell Capital presented his investment thesis on GlaxoSmithKline (US: GSK) at European Investing Summit 2021.

Thesis summary:

GlaxoSmithKline has underperformed the pharma sector by almost 20% over the last three years. The strategic direction of the group has been somewhat unclear following the sale of the oncology business to Novartis for $16 billion in 2015 and the subsequent purchase of Tesaro (also oncology related) for $5 billion in 2018.

The outlook is starting to improve. The company, since 2017 led by Emma Walmsley, plans to split the group into two separate consumer health and biopharma divisions. Both businesses seem to be recovering strongly. The consumer health division, which accounts for 30% of revenue, is a world leader in oral health (Sensodyne), pain relief (Voltaren, Advil, Theraflu), and vitamins (Otrivin and Robitussin). The business should be able to grow by at least 2% per annum, driven by strong growth in these – and other – global brands. GSK foresees an increase in the profitability of the division from 21% in 2020 to the “mid to high 20s” by 2025.

The new biopharma division (70% of sales), of which just over a quarter encompasses vaccines; ViiV Healthcare (HIV therapies) just under a quarter; and one-half other pharmaceuticals. The business has been thoroughly restructured since the arrival of CEO Walmsley. The vaccines business should continue to grow at 6% per annum as the roll-out proceeds of Shingrix (shingles vaccine) in Europe and Japan. ViiV should also grow at some 6% per annum with the introduction of new, less toxic, double-dose regimes.

All in all, GSK expects biopharma revenue and operating profit to grow by more than 5% and 10%, respectively, from 2021 to 2026. The biopharma margin is also expected to expand from 20% in 2021 to 30+% by 2026. Costs are expected to be cut by a further £1 billion by 2023.

GSK shares recently traded on a rather modest 13x 2022E earnings and a 10% FCF yield. With the group about to be split up, one may regard a sum-of-the-parts valuation as more than a theoretical exercise. Stuart believes that the group could be worth at least £20 per share.

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About the instructor:

Stuart Mitchell is the Managing Partner and CIO of S. W. Mitchell Capital and the Investment Manager of the SWMC European Fund, as well as a number of managed accounts. Prior to founding SWMC in 2005 Stuart was a Principal, Director and Head of Specialist Equities at JO Hambro Investment Management (JOHIM, now Waverton Investment Management). At JOHIM he set up and managed the Charlemagne Fund, a long/short European fund, and the JOHIM European Fund, a long only European fund. The JOHIM European Fund rose by 133% since inception in December 1998 until March 2005 compared with 8% for the benchmark index and was number 1 rated by Micropal within its sector and three star ranked by S&P. Upon leaving university in 1987 Stuart joined Morgan Grenfell Asset Management (MGAM) and soon afterwards assumed responsibility for managing the continental European equity assets for MGAM’s British pension fund clients. Stuart was appointed a director of MGAM in 1996. He was then made Head of European Equities and was responsible for $27 billion of equity assets. Whilst at MGAM he managed the Morgan Grenfell European Fund which rose by 123% from January 1990 to June 1996 compared with 85% for the benchmark index and was awarded 1st place by Micropal (5 year awards) in 1996. Stuart was born in Scotland and educated at Fettes College and St. Andrews University where he read Medieval History. He is also a graduate of the Owner/President Management programme from the Harvard Business School. Stuart speaks English and French.

Read a recent article by Stuart on European banks.

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