Head to Head: GlaxoSmithKline vs. AstraZeneca

LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are pharma giants GlaxoSmithKline (LSE: GSK.L  ) and AstraZeneca (LSE: AZN.L  ) .

Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including the big drugs groups.

The shares of GlaxoSmithKline and AstraZeneca have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 3%, but Glaxo is up 3% and Astra has risen 5%.

Let's take our seats at ringside.

Round 1: Earnings

GlaxoSmithKline

AstraZeneca

Recent share price 1,433p 2,937p
Last year price-to-earnings ratio 12.6 6.3
Current year forecast P/E 12.3 7.9
Four-year average earnings per share growth (%) 19 14
Current year forecast EPS growth (%) 2 -19
Forecast operating margin (%) 29 30

Source: Digital Look. Winners in bold.

Astra takes points for an eye-catching "value" P/E rating, while Glaxo scores for superior earnings growth. Strictly speaking, Astra wins the round on forecast operating margin, but it's such a close call that it would be splitting hairs to declare the round anything other than a draw.

Round 2: Dividends

GlaxoSmithKline

AstraZeneca

Last year dividend yield (%) 4.9 6.0
Current year forecast dividend yield (%) 4.2 6.2
Four-year average dividend growth (%) 7 11
Current year forecast dividend growth (%) 6 4
Forecast dividend cover 1.6 2.0

Source: Digital Look. Winners in bold.

Glaxo's dividend yield, growth and cover are very decent, but Astra trumps its rival on almost every point. Only on current-year forecast dividend growth does Glaxo sneak a consolation point.

Round 3: Balance sheet

GlaxoSmithKline

AstraZeneca

Price-to-book ratio 8.0 2.5
Net gearing (%) 114 8

Source: Digital Look. Winners in bold.

Astra hammers Glaxo in the final round, giving it two winning rounds and one draw. Astra takes eight points, Glaxo three, and one point is shared.

Post-match assessment
On the face of it, this was a comfortable win for Astra. However, the striking negative earnings growth forecast for the current year (-19%) points to a problem that eclipses all the positives in the eyes of many investors.

Patent protection for some of Astra's best-selling drugs expires in the next few years. It's a problem other big pharma groups are also facing -- but not to the same extent as Astra.

In my view, though, as a general rule of thumb, when the market is pessimistic about a company, the pessimism is often overdone; conversely, when the market is optimistic, the optimism is often overdone.

On this basis, it seems to me there's a good chance that there's more than enough pessimism in unloved Astra's current rating and that the company's value credentials could handsomely reward patient investors in the long run.

Big pharma groups are among the largest holdings of top City investor Neil Woodford, the man whose funds have outperformed the market by more than 300% over the past 15 years.

You can learn about Woodford's enormously successful investing strategy and the other dividend-paying blue chips he currently favors in an exclusive Motley Fool report, “8 Shares Held By Britain's Super Investor”. The report is free to download right now, simply by clicking here.

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G. A. Chester owns does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.
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