GSK’s strategy looks good

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Published: 10:43PM GMT 06 Feb 2010

GlaxoSmithKline

£12.06

Questor says BUY

DRUG giant GlaxoSmithKline has got its strategy right. It is moving away form “white
pill/Western markets” and focusing on growth in emerging economies and
on its consumer products operation. This is good news for future growth. In
2009 its emerging business grew 20pc and consumer health care grew a
spectacular 7pc.

The company makes consumer goods such as Sensodyne, Ribena and Lucozade.
However, the most important reason to own the share is for its huge cashflow
– and consequent solid dividend payments.

At its full-year results release last week, Andrew Witty, chief executive, said
the group would withdraw from some
specific health areas.

The company will move away from some high risk areas and slash its
infrastructure costs. More job losses are expected as the focus of R&D
changes.

2009 sales rose 16pc to £28.4bn, although for constant currencies the figure
was a more modest 3pc. Pre-tax profits rose to £7.9bn from £6.7bn.

The group has left the worst of its generic problems behind it – unlike
AstraZeneca – with only Valtrex coming off patent soon. The company also has
an improving pipeline, which includes the recent US approval of cancer
vaccine Cervarix.

The shares were first recommended at £12.51 on October 29 last year and they
are now 4pc below this level. However, the shares are yielding a safe 5.3pc
in 2010 and this is well worth having. New investors can grab the final
quarterly payment of 2009, which will be paid on April 8, if they buy the
shares before Wednesday.

Trading on a December 2010 earnings multiple of 10.1, falling to 9.8 next
year, the stance remains a buy.

Electrocomponents

181.6p

Questor says BUY

FRIDAY was a grim day for the stock market, but shares in Electrocomponents
(ECM) still managed to rise after posting an excellent trading update.

Questor went against the consensus view in the City when a purchase of ECM
shares was advised in July last year, but each successive quarter is showing
an improvement. Questor is still positive on prospects for the group.

The electronics parts supplier is said it had seen a sharp improvement in
sales. In the four months to the end of January, sales were flat
year-on-year, but all regions had returned to year-on-year sales growth by
December.

In January, group sales grew by around 10pc with ECM’s international business
growing 12pc and the UK business by around 5pc. Within the international
business, Europe sales grew by 8pc, North America by 15pc and Asia Pacific
by around 21pc.

The company is increasingly selling its products online. In January e-commerce
revenue grew by around 30pc to about 45pc of group sales.

All of which means that the dividend is looking increasingly secure. The
shares are yielding 5.9pc in the year to March 2010, which is well worth
having.

The shares were first recommended at 140¼p on July 19 and the shares are now
29pc ahead. Investors who bought at that time would also have locked in a
yield of about 7.1pc, although the prospective yield is still attractive.

The 2010 multiple, at 18.9 times, is high, but ECM continues to outperform
expectations. Buy.

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