Glaxo Gains Jefferies Upgrade on Stronger HIV Drugs Performance, Currency Benefits
Bloomberg News
Formerly an embodiment of what boardroom inertia can do to a company in a competitive and evolving market, Glaxosmithkline's (GSK) - Get Report proverbial stock continued to rise on Thursday after analysts at Jefferies upgraded the drugmaker to buy. They slapped a price target of 2,000 pence ($26) on the stock, up from 1,650 pence, which implies upside of around 27% from current levels.
Jefferies analysts cite improving dividend cover and the likelihood of stronger margins, driven in part by a better-than-expected performance from the ViiV Healthcare joint venture with Pfizer (PFE) - Get Report , as being key to their rationale.
"We believe that the improving yield quality will continue to attract investors (pushing), down to a yield of 4% or less" they noted on Thursday.
Revenue and and earnings from Glaxo's majority ViiV Healthcare stake have been stronger than expected since management decided, in May 2015, not to spin off the operation in a mooted initial public offering. Glaxo owns 85% of ViiV Healthcare.
Glaxo has also been one of the greatest beneficiaries of United Kingdom's vote to leave the European Union, given the likely boost it will receive each time the drugmaker swaps its large streams of foreign currency-denominated revenue for the bombed out pound. The stock has risen by around 20% since the outcome of the vote became known.
Investors have also bid the stock higher throughout the second quarter after Glaxo announced in March this year that CEO Andrew Witty would retire next March.
The incumbent CEO had been blamed for a lackluster performance at the pharmaceuticals company.
Under Witty, Glaxo has shunned any kind of transformative M&A and has been reluctant to consider assets sales, despite that patent expiries and the "genericization" of drug franchises have placed pressure on earnings in recent years.
Some observers have questioned the sustainability of Glaxo's dividend in recent quarters after the "guaranteed" payout of 80.0 pence per share exceeded earnings per share by 25% in 2015.
The prospect of a new CEO, who is yet to be named, has driven hopes that Glaxo could soon seek to boost cash resources through the disposal of its consumer health business and potentially engage in mergers and acquisitions.
The shares were down by 0.5% in london during early afternoon trading, at 1,643.5 pence, but rose by as much as 1% shortly after the opening bell.