Stock Review: Glaxo SmithKline Consumer Healthcare

 

Glaxo SmithKline Consumer Healthcare is currently trading at a PE of 31.37 times (April 06, 2011). This is much higher than its five-year median PE of 17.70.

 

Over the past five years, the company's earnings per share (EPS) has grown at a compounded annual growth rate of 19.47 per cent. This gives it a PEG of 1.6. Usually, a stock is considered to be attractively valued when it has a PEG of less than one.

 

When one looks at both these valuation parameters, it is clear that the stock is trading in the expensive range - both considering its own historical valuations and vis-à-vis the growth rate in its earnings. Thus, based on valuation parameters, it appears that this might be a good time to sell the stock and book profits.

 

However, the company has sound fundamentals. It is a zero-debt company. Over past five years, its return on equity (RoE) has improved from 21.26 per cent in CY05 to 27.95 per cent in CY09.

 

Currently, like most companies in the FMCG sector, Glaxo too faces rising raw material costs. Expenditure on advertising is likely to stay high on account of growing competition within the FMCG sector. However, the company enjoys strong pricing power on account of which analysts expect that it will be able to maintain its operating margins in future.

 

What you have is a blue-chip. You can exercise one of the following two options: either sell now and book profits, or else ride this growth story for at least the next five years.

 

As you have held this stock for over a year, the gains will be exempt from tax as long-term capital gains tax on equities is zero.