GlaxoSmithKline - The Cheapest Major Healthcare Stock

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

GlaxoSmithKline (NYSE: GSK) might be the cheapest major health care stock you can buy right now. Does that surprise you? Let's take a minute and compare GSK to some other major players and see what the numbers tell us.

<table> <tbody><tr> <td><strong>Name</strong></td> <td><strong>Symbol</strong></td> <td><strong>Price</strong></td> <td><strong>P/E on '12 estimates</strong></td> <td><strong>Growth Expected</strong></td> <td><strong>PEG</strong></td> <td><strong>Dividend</strong></td> </tr> <tr> <td>GlaxoSmithKline</td> <td><span data-id="203785">(NYSE: GSK)</span></td> <td>$44.53</td> <td>12.94</td> <td>12.78%</td> <td>1.01</td> <td>4.87%</td> </tr> <tr> <td>Johnson & Johnson</td> <td><span data-id="204142">(NYSE: JNJ)</span></td> <td>$64.94</td> <td>12.44</td> <td>6.03%</td> <td>2.06</td> <td>3.51%</td> </tr> <tr> <td>Merck & Co</td> <td><span data-id="204567">(NYSE: MRK)</span></td> <td>$38.88</td> <td>10.15</td> <td>4.57%</td> <td>2.22</td> <td>4.32%</td> </tr> <tr> <td>Pfizer</td> <td><span data-id="204972">(NYSE: PFE)</span></td> <td>$21.75</td> <td>9.42</td> <td>3.05%</td> <td>3.09</td> <td>4.05%</td> </tr> </tbody></table>

Knowing these numbers, which company would you say looks like the one to buy? Here is the deal -- you should always want a company with a higher growth rate even with a higher P/E as long as the PEG ratio isn't past 1. I think GSK fits the bill with its 1.01 PEG. The reason is as the company grows, its P/E will compress faster than a slower-growing company with a lower P/E.

In addition, a company with a faster growth rate has the ability to use that extra cash to buy back shares (something GSK is doing) and to increase the dividend (also something GSK is doing). Right now the market is saying we would rather pay the equivalent of two to three times more for JNJ, MRK, and PFE than we would for GSK.

Those other companies are clearly stalwarts, but does that make GSK worth two to three times less? I can't see why it should. Right now you can buy GSK with better growth, a PEG that is half of its competitors, and it also has a higher trailing dividend yield.

So why is GSK not getting more respect? It's likely because GSK is a foreign company, and in particular any company that seems tied to Europe gets a bad rap. So if GSK's connection with Europe is a pitfall, let's see how much GSK really profits from its home country. In the last quarter GSK's operating profit was broken down as follows:

USA - 44.82%
Europe - 27.66%
Japan - 12.75%
Emerging Markets - 9.94%
Asia Pacific - 4.83%

As you can see, GSK actually gets about half of its profits from the U.S. and Europe comes in a distant second. The fact that Emerging Markets, Japan, and Asia Pacific represent a combined 27.52% shows that some of the fastest-growing regions of the world are where GSK has some of the most opportunity. 

One of the primary reasons many analysts would give to buy Johnson & Johnson instead of GlaxoSmithKline is because of the diversification the company offers. My question would be, have you looked at the diversification that GSK offers? The company has over 90 prescription medicines in many stages of development from early stage trials to blockbusters that people already know about. GSK also has well over 75 consumer health care brands, including well-known names like Aquafresh, Zantac, Tums, Polident, Nicoderm, Nicorette, and Abreva just to name a few.

GSK has identified that some of these consumer health care brands are non-core and they expect to divest these assets. The best part about these divestments is the company has already said it expects to return any net proceeds to shareholders ("GlaxoSmithKline provides update on divestment of non-core, over-the-counter (OTC) brands," GSK press release, 12-20-11).

So while I understand that Johnson & Johnson, Merck, and Pfizer are household investment names, maybe there is another company that deserves space in your investment "medicine cabinet."

The Motley Fool owns shares of GlaxoSmithKline and Johnson & Johnson. MHenage has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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