Legendary Fidelity Investments portfolio guru Peter Lynch used to spend his Saturdays following his wife around the Chestnut
Hill Mall in suburban Boston. While his wife shopped for clothes and household knickknacks, Lynch was shopping for a different
Let me explain. Lynch theorized that stores that attracted the most foot traffic must be companies that did a good job in
creating demand for their product. After all, you'd have to have a great product to make people jump out of their beds in
the morning and drive down to the mall to give you their money.
Thus Lynch's portfolio wound up chock full of profitable companies like The Gap, Target and Home Depot. His mutual fund—Magellan—prospered
I took a page out of Lynch's book last weekend, meandering through a CVS Pharmacy waiting for a prescription to be filled.
I've been anxious to write about GlaxoSmithKline (GSK), one of the largest pharmaceutical companies in the world and a dominant
force on drugstore shelves across North America and Europe.
In the big pharma world, drugstore aisle space is every bit as important as Times Square is to New York real estate developers.
And few pharma giants fill that space as well as GlaxoSmithKline, with global brands like Aquafresh, Tums, Abreva, Polident,
Panadol, and—as a result of a recent purchase—Breathe Right nasal strips. It's a veritable "who's who" of pharmacy aisle mainstays.
This month's article will build a case for investors to consider adding Glaxo to their portfolios. Granted, the healthcare
and healthcare products sectors have been under the weather pretty much all year. The Standard and Poor's Health Care Index (HCX) is barely up 6% for the year and the biggest laggards have been the pharmaceutical companies.
THAT IS, EXCEPT FOR GLAXOSMITHKLINE
Glaxo has had a strong year, reporting revenue increases (through August) of about 10% on robust sales of the company's asthma
and diabetes drugs, and from its solid line of consumer staples and vaccines. Net profit margins are hovering around the 14%
mark, and the company recently hiked its estimated growth rate to 12%, up from 10% earlier this year (Wall Street analysts
refer to expected growth rates as "guidance" numbers, because the numbers provide them with a blueprint for a company's fiscal
Most companies are conservative with their guidance numbers. Fearful of falling afoul of federal regulators in the era of
Sarbanes-Oxley and corporate accounting scandals, publicly traded companies would rather err on the side of over-caution than
be caught "promising" investors returns that may not materialize. This impacts the projections that companies give to Wall
THE ANALYSTS AWAKEN
Even so, many analysts are waking up to Glaxo's potential. When you bottom-line Glaxo you see a pharma giant definitely on
the upswing. Its products are selling like hotcakes. Advair for asthma and Coreg for cardiovascular disease, are seeing sales
growth of 25% to 35% annually. Citigroup analyst Kevin Wilson says product sales will boost Glaxo annual sales to $41 billion
in 2006 and $42.5 billion in 2007. He pegs the company's stock price target at $58 per share, up from $54 in mid-October.
He is hardly alone. Wendell L. Perkins, chief investment officer at Johnson Asset Management (Racine, WI) and comanager of
the Johnson Family International Value Fund, predicts that Glaxo shares will rise to $68 in the next year-and-a-half. His
fund began buying at $43 in early 2004 and continues to snap up shares. "Glaxo has an attractive valuation and generates about
$5 billion of free cash flow annually that it can use to buy back stock and pay its 3.0% dividend," Perkins told Morningstar,
Inc. (Chicago) in September 2006."We're still seeing strong growth from a number of drugs in the current product line, and
hopefully a number of key drugs will come to market in the next couple years," he said.