Value stocks have been top performers in recent months, especially as inflation is soaring. This means that many investors have turned their attention to low valuations, rather than strong growth prospects. GlaxoSmithKline (LSE: GSK) is a FTSE 100 stock that looks cheap from a valuation perspective. These are the reasons why I’m tempted to buy.
Bid for consumer healthcare unit
Last week, it was reported that Unilever made a £50bn for the GSK consumer health business. The consumer health business includes brands such as Sensodyne toothpaste and Panadol painkillers. GSK owns around 68% of the business, with the rest owned by Pfizer. This bid was rejected by GSK, which was holding out for a larger offer. While a higher offer does not seem forthcoming, especially considering the investor backlash that Unilever faced on news of the bid, it still shows several promising signs.
For example, despite the fact that GSK don’t have complete equity ownership, a valuation of £50bn is still extremely generous. Indeed, it values GSK’s stake in the business at around half of GSK’s total market cap. This is despite the fact that in the first nine months of 2021, sales in the consumer healthcare unit totalled just £7bn, while total sales were over three times higher at over £24bn. As such, it seems that the company’s pharmaceuticals and vaccines business may be very undervalued.
There is also an expectation that the consumer healthcare unit will be spun off or sold at some point in the near future. If it can obtain a valuation over £50bn, this will surely see the GSK share price climb.
Other factors
There are other indications that the GSK share price may be undervalued. For example, it has a current price-to-earnings ratio of around 16, which is not at all expensive for a pharmaceutical company. In addition, it expects to see operating growth of more than 10% per year, primarily driven by vaccines and speciality medicines. It must be mentioned that this growth is dependent on successful trial results however, a factor that is far from guaranteed. Like many other pharma companies, a lack of successful trial results is, therefore, a severe risk.
Although the company currently yields around 5%, placing it in the top half of FTSE 100 stocks, this also seems set to change. Indeed, after the consumer healthcare business is spun off, the combined dividend of the two companies is expected to be 55p, 30% below the current payout. This equates to a yield of just over 3%. While this is potentially a bearish sign, I feel it may be good in the long-term future of the company. This is because it will allow more investment in the vaccine and pharmaceutical sectors. Therefore, I’m not too worried by this fact, as I think it’s the correct decision.
What am I doing with this FTSE 100 stock?
GSK shares are hardly exciting, and there are many FTSE 100 stocks with better dividends and growth prospects. However, the shares do seem slightly undervalued, and current change seems promising. As such, I feel that there is some upside potential in GSK shares. I would not be opposed to initiating a small position in the company in my own portfolio.
