Excellent News on GSK! Must read!
Strengthening U.S. Dollar Presents Remarkable Foreign Opportunities - GlaxoSmithKline
Feb. 4, 2015 8:58 AM ET | 1 comment | About: GlaxoSmithKline (GSK), Includes: PFE
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary - A strong dollar presents very attractive investment opportunities in international companies.
- GlaxoSmithKline is uniquely-positioned in the pharmaceutical company to take advantage of a weak Euro.
- GlaxoSmithKline shows plenty of upside potential for both long-term and short-term investors.
OverviewThe growing strength of the US Dollar is good news for American investors and companies. The strong Dollar also creates excellent investment opportunities in foreign-based companies. This is part 3 of a series exploring these opportunities. Part 1 reveals the risk to some US companies in light of a strong dollar and investigates a good hedge opportunity. Part 1 explored a British company, Unilever's, excellent investment opportunity in light of its American counterpart Procter & Gamble's recent financial struggles. While Part 2 looks a great foreign investment in Inbev no matter how 2015 plays out on the global stage.
In part 3, the analysis will turn back to the British and investigate another hedge opportunity with very strong technicals in a great industry. In a recent earnings call, Pfizer sited foreign exchange (FX) rates as being the biggest negative impact to their bottom line for the fourth quarter. GlaxoSmithKline (NYSE: GSK), Pfizer's British counterpart, will experience the reverse outcomes in the months to come and stands to profit heavily.
Pfizer EarningsPfizer reported that FX exchange rates negatively impacted revenue by $453 million, but only had a $351 positive impact on costs. The final result was a $102 million dollar loss due to a stronger dollar.
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Source: Pfizer Fourth Quarter Presentation
The impact on revenue was enough to cause an immediate 1% price drop in before-market trading, and the stock finished the week of trading down almost 4% from the pre-earnings price. The loss of profit not only affects Pfizer's earnings, but it slows the company's ability to invest in research & development as well as acquisitions for the coming quarter. These limitations are significant for the 2015 investment horizon.
The British PoundFor full analysis of the US Dollar to British Pound Sterling exchange rate, please see Part 1. The general point is that the Dollar has made 10% gain on the Pound over the past 6 months, which will directly impact businesses operating overseas.
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Source: StockCharts
The strong trend upward as well as the macro-environmental factors indicate that the exchange rate should stay at the current price level or continue to increase over the first few quarters of 2015.
The GlaxoSmithKline OpportunityInvestors should think about the GlaxoSmithKline investment opportunity as a triple benefit to their portfolios. First, GSK obviously helps investors take advantage of a strong dollar and hedge against a US company struggling with a strong dollar. The second benefit is the fact the GSK will be better-positioned to invest in small pharmaceuticals in the coming year due to the profit advantages it will have compared to its American counterparts. The third and final benefit is, investors have a great opportunity to invest in a stock with strong technical indicators signaling a buy, which will bolster returns in the short- to mid-term ranges.
Due to the exchange rates, where Pfizer faces losses in converting weaker currencies back to the strong dollar, GSK has the ability to convert a strong Dollar back to the weaker Pound and generate excess profits. These excess profits will directly impact the shareholder in terms of increasing valuations and potential for excess dividends.
GSK also has another advantage beyond the direct transfer of these profits to shareholders. They can choose to invest these excess profits into smaller pharmaceutical companies. The advantage here is the Pfizer now has $100 million less to invest, and GSK will have considerably more to invest. Therefore, GSK is strategically positioned to capitalize on the best investment opportunities in 2015. As a result, investors could see returns from this advantage for years to come.
Investors should also be very conscious of the current technical indicators for GSK's stock. GSK has been trading near the bottom Bollinger Band since June 2014. Since December, the price has begun to trend upward from the Bottom band with 10% upside potential to the top band and 50-day moving average. Additionally, the convergence divergence indicator shows a strong valley, which would indicate a pending upward swing in price.
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Source: StockCharts
GlaxoSmithKline has huge upside valuation potential. Based on current and forward PE projections, GSK has a huge upside as it catches up to the market average. For conservatism purposes, the valuation will assume a 90% of average market value to account for companies with one-time issues affecting PE. |
