gsk

1. Name ofcompany: GlaxoSmithKline PLC RIC: GSK.L
Price: 1598.00 GBp Date: 12/01/2014
GICS: Healthcare
Company profile:
GlaxoSmithKline PLCisa research-basedpharmaceutical company.The companydevelops,
manufacturesandmarketsvaccines,prescriptionandoverthe countermedicinesaswell ashealth-
relatedconsumerproducts.
One-yearPrice chart:
Price performance:
%Past month %Quarter %Half year %1 year
GSK -0.43% -5.49% 23.445% 20.71%
FTSE-100 1.48% 3.97% -7.906% 14.43
Risk Adj. -0.49056% 3.02066% 18.52998% 11.73454
Key financial ratios and forecasts:
Beta P/Book Op Margin Assets/Equity
0.622 11.27 34.7 14.01
EPS DPS ROE PE DY
Actual Dec 12 0.93 0.74 65.96 14.36 5.54
Estimate Dec 13 1.07 0.78 80.12 14.04 4.87
Estimate Dec 14 1.02 0.82 76.57 13.19 5.14
Valuation(by DDM and by comparables):
By comparables P/EPS DPS/P P/Sales P/Book Average
18.693 6.527 15.7096 15.934 14.2159
Multistage
growth DDM
MRP Rf LT growth K Fair value
6% 3.6% 4.3% 7.332% 24.84264
Analysts’recommendation:
Buy Hold Sell
Number 9 19 5
Lookingat the analystrecommendationIwouldsayholdonto sharesor holdoff buying sharesin
GSK at thismomentintime.

2. Introduction
GlaxoSmithKline plc(GSK),incorporatedonDecember6,1999, isglobal healthcare group,
whichisengagedinthe creationand discovery,development,manufacture andmarketingof
pharmaceutical products, includingvaccines,over-the-counter(OTC) medicinesandhealth-
relatedconsumerproducts.The Companyoperatesinthree primaryareasof business:
Pharmaceuticals,VaccinesandConsumerHealthcare.
Price performance and newsanalysis:
Date Tesco FTSE-100 Numerical
Calculation
Risk adjusted
31/12/2013 1607 (-0.71%) 6749.09(1.20%) 0.71-0.622*1.20 -0.0364%
29/11/2013 1618.5(-1.52%) 6650.57(-1.20%) 1.51-0.622*1.20 1.52%
31/10/2013 1643.5(5.52%) 6731.43(4.20%) 5.52-0.622*4.20 5.52%
30/09/2013 1557.5(-5.35%) 6462.22(0.80%) 5.35-0.622*0.80 5.35%
30/08/2013 1645.5(-2.29%) 6412.93(-3.14%) 2.29-0.622*3.14 2.29%
31/07/2013 1684(2.18%) 6621.06(6.50%) 2.18-0.622*6.50 2.18%
28/06/2013 1648(-3.82%) 6215.47 (-5.58%) 3.82-0.622*5.58 3.82%
31/05/2013 1713.5(3.19%) 6583.09(2.38%) 3.19-0.622*2.38 3.19%
30/04/2013 1660.5(7.93%) 6430.12(0.29%) 7.93-0.622*0.29 7.93%
29/03/2013 1538.5(5.66%) 6411.74(0.80%) 5.66-0.622*0.80 5.66%
28/02/2013 1456(0.73%) 6360.81(1.34%) 0.73-0.622*1.34 0.73%
31/01/2013 1445.5(8.28%) 6276.88(6.43%) 8.28-0.622*6.43 8.28%
News:Two firm-specificnewsitemsandtwo systematic announcements
Date Newssummary Briefcomments
Jul 27, 2011
03:51:18 AM
Firm-specific
GlaxoSmithKline PLC(GSKLN) wasraisedto
"Buy"from "Sell"atBryan Garnier& Cie by
equityanalystEricLe Berrigaud.The target
price isGBp 1,600.00 pershare.
GlaxoRises;PESet to BidFor OTC Unit,Dow
JonesSays
GSK LN trading0.8% higher,vol.55% of 3-mo.
dailyavg.;amongtop SXXPHealthcare gainers.
Thisnewsmeansthat GSK
share price is expectedto
grow andone analystnow
saysthat you shouldbuy
sharesnot sell.
May 20 2013
11:45:40
Market
systematic
U.K. Stocks Advance as Benchmark FTSE 100
Closesat12-Year High
U.K. stocks advanced for a second day as the
benchmark FTSE 100 Index closed at its highest
level since September2000.
The FTSE 100 added 32.57 points, or 0.5
percent, to 6,755.63 at the close in London. The
gauge climbed 1.5 percent last week and has
surged 15 percent so far this year, boosted by
central-bank stimulus. The broader FTSE All-
Share Index gained 0.4 percent today for a 13th
straight advance, it’s longest since 1987.
This news article shows that
the Market has risen to its
highest in 12 years. This has
been helped from the
central-bank stimulus. This
also has helped boost
companies in the FTSE 100,
as you can see in the graph
that GSK also rose along
with the market price at this
time.

3. Ireland’s ISEQ Index increased 1.5 percent to
the highestlevelsince September2008.
Oct 7 2013
11:36:10
Market Specific
London Cash Buyers Send Banks North to
RiskierLoans:Mortgages
The risky loans that helped cause the U.K.’s
real-estate crash are making a comeback as
cash buyers from abroad limit lending
opportunities in London and banks instead
venture intothe weakestmarkets.
David Cameron’s government this week
introduces mortgage guarantees designed to
allow people to buy a home costing as much as
600,000 pounds
This article explains the
contribution to the market
price dropping. It is because
banks were continuing to
give out risky mortgages in
weak markets because of
the announcement from the
government. This has
especially affected the
Northregion.
Jul 02, 2013
03:14:52 AM
[NYT]
Firm Specific
GlaxoSmithKline IsInvestigatedinChina
The British pharmaceutical giant
GlaxoSmithKline said on Monday that the
authorities here were investigating whether
senior managers working for the company in
Chinawere involvedin"economiccrimes."
This could harm the
companies brand image as
well as turn out to be a
costly lawsuit if found guilty
of bribery. This could have a
dramaticon the share price.
Valuation:
Multi-stage DDM
Firstyou mustworkout whatK equals-
K= Rf + B (E(Rm)-Rf)
K= 3.6 +0.622*6= 7.332% or 0.07332
Analyst Forecast
V0=
074
1+0.07332
+
0.78
(1+0.07332)2
+
0.82
(1+0.07332)3
+
0.82(1+0.07369)
(0.07332−0.07369) 𝑥(1+0.07332)^3 =204.8904
Economic Model Forecast V0=
0.74
1+0.07332
+
0.78
(1+0.07332)2
+
0.82
(1+0.07332)3
+
0.82(1+0.043)
(0.07332−0.043) 𝑥(1+0.07332)^3 = 24.84264
DDM ROE Forecast
V0=
0.74
1+0.07332
+
0.78
(1+0.07332)2
+
0.82
(1+0.07332)3
+
0.82(1+0.16901)
(0.07332−0.16901) 𝑥(1+0.07332)^3 = -6.07204
The Vo that I woulduse isthe EconomicModel forecastthisisbecause mygrowthrate was higher
than myK for the ROE forecastand analystforecast.Iincludedthe raw betawhencalculatingthe
DDM. The smallestvariationtothe marketprice wasthe EconomicModel forecast,whichcame out
the closest.The othershada muchlarger variationone beingaminusfigure,the other wasmuch
higher.Thisisbecause the growthrateswere muchgreaterthan K and because of thisyoushouldn’t
use theirDDM.
You alsoneedtodiscuss howyou arrive at the estimate of LT growthrate of dividends(e.g.,from
analysts’forecast,ROE*bor macro-economicbasedmodel).If there islarge deviationbetweenV0

4. and marketprice,a report that gainsa highmark wouldoffersome reasonableexplanationsfor the
difference.
EPS DPS ROE
Actual Dec 12 0.93 0.74 65.96
Estimate Dec 13 1.07 0.78 80.12
Estimate Dec 14 1.02 0.82 76.57
Analysts’ forecast Economic model ROE*b
LT growth rate 7.369% 4.3% 16.901%
How I calculate ROE*b
b= 1- AvgDPD/ AvgEPS
b= 1-0.78/1.006= 0.2277
ROE*b= Avg ROE * b
ROE*b=0.2277* 74.216
You getthe longtermgrowthrate of dividendsforROE*bas seeninthe calculationsabove.You
needtofindthe average forEPS and DPS.This helpscalculate b.Thentoget ROE*b youfindthe
average ROE and multiplyb.
You can findthe analystsforecastforlongtermgrowth rate on BloombergbytypingANR inthe top
leftbox andthe figure canbe foundon that page.
By comparables:
Use sectormedianratioto estimate fairprice usingPE,P to Book, DividendYield,Price toSalesand
take the medianvalue of these fairpricesasthe intrinsicvalue bycomparable
Numerical calculationsneedtobe shown.
PE DY P to Book P to Sales
Tesco 14.36 5.54 11.27 2.48
Sector median 20.10 4.83 12.85 2.92
EPS DPS BVPS Sales PS
Tesco 0.93 0.74 1.240 5.38
Answersand calculationsfor valuation by comparable (see tearsheet):
Sectormedian* GSK EPS= 20.10*0.93=18.693
SectorMedianDY/DPS= 4.83/0.74= 6.527
SectorMedianP to Book * BVPS= 25
SectorMedianP to Sales* SalesPS= 4.3%
SML analysis:
The securitymarketline (SML) analysisiswhere youuse agraph or othervisual chartsto show the
expectedreturn-betarelationshipof the CAPM.
SML isthe mean-betarelationship;the line of bestfitisthe riskpremiumof the marketportfolio.
The beta of a securityisthe bestwayto measure itsriskas betais proportional tothe variance that
the securitycontributestothe prime riskyportfolio.The SMLprovidesabenchmarkforevaluationof
investmentperformance.

5. E(rm)=Rf-B(E(Rm)-Rf)
Raw Beta- 3.6+0.622*6= 7.332%
AdjustedBeta- 3.6+0.748*6=8.088%
Beta=1 – 3.6+1*6
Beta=0 - 3.6+0*6= 3.6%
Alpha- a+Rf+B (E(Rm)-Rf)
Raw Beta- 0.015+3.6+0.622*6= 7.347%
AdjustedBeta- 0.015+3.6+0.748*6=8.103%
As youcan see fromthe graph whenbetaisat 0 the expected returnisat3.60. Howeverthisisthe
leastriskybeta.Whenthe betais at 1 the expectedreturnis9.60% howeverthe betaismuch
higher.Asyoucan see fromthe SML calculationsthatwiththe Raw Beta (0.622 GSK’sexpected
returnsare 7.332% and the adjustedbeta(0.748) is8.088%. This can be comparedto the alpha
whichcan be seenwhere the linesinterceptthe SML.Asyou can see the figuresare slightlyhigher
than the SML line whichmeansthatthe sharesare undervalued.
Discussionof PE versus DDM methods:
The PE advantagesare that it’san easyratioto calculate andunderstand.Itisa muchbetterwayto
showthe real value of a share thanlookingat justprice.The PE allowsyoutolookat paststock
performance andcompare itto the current PE, itcan also be estimatedforthe future.Itisa very
useful benchmarkingratioasyoucan also compare itto othercompaniesPE.
Some disadvantagesof PEare that it takesintoaccount historical costslike depreciation,but
because itdoesn’ttake inflationintoaccountsothe economicvaluesare notaccurate. Itmay look
simple butit’sa challengingasyouhave to forecastthe earnings,butthese canbe affectedby
variousfactors.You cannotsay whetherthe PEis toohighor low withoutlinkingbacktothe
companies’ longtermgrowthprospectsandcurrentearningspershare.
One advantage of DDM isthat it allowsthe usertovalue the stocksbasedon the dividendthatthe
companypay.It’s a fairlyeasymethodtocalculate asyou justhave to calculate the formula.The
DMM can alsobe reversedsothatthe upto date stockprice can be usedto assignmarket
assumptionsforthe dividendgrowthandmarketreturn.
The disadvantagesof DMM are that it providesavalue fora companyunlessitpaysdividends,the
formulaalsousessome estimatedfigureslike itsfuturedividends. The methodisn’tveryaccurate
9.60%
8.09%
7.33%
3.60%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
0 0.5 1 1.5
SML Analysis
Expected Return

6. whenitcomesto companiesthathave a highgrowthrate on the stocks,it alsoignoresanybuy-
backs which meantheydon’tshowotherwaysof returningcashto stock holders.The DMM isalso
too conservative.
Analysts’view:
Natixis- 24October2013-Quarter undercontrol.
In the face of adverse impactsonsales(China),GSKmanagedtocontrol costsand publishgood
results.The group’sgrowthpotential will neverthelessremainbelow average,due tothe inevitable
erosionof Advairovertime. AfterRoche andNovartis,GlaxoSmithKlineisthe thirdEuropeangroup
to publishagoodset of results, whichwere slightlyaheadof expectations.However,the momentum
didnot come fromstrong sales,butfroman effortoncosts, withthe resultthatthere isno
significantchange tothe group’sprospects.The erosionof Advair’ssalesisneverthelessinevitable
overtime andthe newgenerationneedstosucceedif the respiratoryfranchise istogrow (+4.3% a
yearestimatedover2013-2018). Analyst Recommendation:Neutral rating maintained
Natixis- 25July2013-No valuationleverage
AlthoughQ2figuresdid notdisappoint,theyleave little scope forestimatestobe upgraded.Growth
remainssluggishrelativetothe sector.The marketcouldremainfocusedonthe corruptionaffair
and the prospectof harsherbusinessconditionsinChina. DecentQ2resultsare notenoughforus to
raise our forecasts.Lookingoutto2018, evenif new productsare successful (£5bncontributionin
2018, i.e.19% of sales),salesgrowthwill remainlimitedto2.8% a year(below the sector) with
earningsgrowthaveraging4.6%versus 5.6% for the sector. Analyst Recommendation:Hold
JPMorgan- 14 August2013 - Upside fromupcomingcatalystsbalancesoutearningsrisk
We upgrade toNeutral (UW),settinga £19 PT, 13% potential upside.Whilstwe believecons.*
expectationsfor2014 Core EPScouldprove slightlytooambitious,we seenumerous datapoints
overthe next6m that coulddrive upgrades.AnalystRecommendation:Neutral
JPMorgan- 30 October2013-Updating forQ3 and recentsetbacks,modest accelerationinunderlying
trendsexpectedfor2014.
We update forQ3, and recentsetbacks,includingthe Chinainvestigation,Advair/Breoformulary
non-coverage andpipeline failures,aswell asFX.BothRevenuesandCore EPSare trimmed6-7%
2014-18. With modestaccelerationingrowthtrendsin2014, we anticipate limitedmultiple
expansion,hence we putGSKon 14x 2015 PE, now £17.50 (prev.£19), 7% upside.Reiterate Neutral.
Analysts’recommendation:Neutral
Conclusion:
Overall Iwouldrecommendyoutoholdoff buyingorholdonto any sharesyouhave for this
company. Thisisbecause lookingatthe riskadjustedreturnsinthe past quarter isn’tveryhigh. It
oftenfollowsthe trendwiththe FTSE100. The newscan helpsupportthisasin the past quarter
there have beenproblemsinChina regardingGSKwhichmayaffectthe share price.HoweverIstill
feel youare betteroff toholdon as the price shouldimprove.AlsoIagree withthe analyst
recommendationsfromthe reportgivenandinthe tearsheet,where the majoritythinkthatyou
shouldhold.Asthe numberof people sayingholdwasmuchgreaterthanthe othersand myopinion
fromcarrying outthe researchthatit isthe bestoption. Iwouldalsorecommendusingthe
economicmodel forecastfigurefromDDMas thisiscame out withthe bestresult.Fromlookingat
the SML the stocks are undervaluedsothisalsobacksupmy argument forholding.