GSK (LSE: GSK) shares have taken a hit over the last six months. As a result, they look pretty cheap right now. I’m interested in adding some more healthcare stocks to my portfolio. Should I buy GSK? Let’s take a look.
The new-look GSK
After spinning off its consumer healthcare division (Haleon) last year, GSK now operates in two main areas – medicines and vaccines. Its R&D focus is on four therapeutic areas – infectious diseases, HIV, oncology, and immunology.
I’m comfortable with this new-look structure. Having said that, I do miss the stability that the consumer healthcare division brought to the business.
Sales growth
Moving on to business performance, GSK’s Q3 2022 results showed the company is performing quite well at present.
For the period, total sales were up 9% year on year to £7.8bn (up 7%, excluding Covid-19 products). Breaking this down, Speciality Medicines were up 24% (+11%, excluding Covid solutions) while vaccines were up 5% (+9%, excluding Covid). On the back of these results, the group raised its guidance for 2022.
Looking ahead, management is confident about the future, saying it expects “good momentum” in 2023 as a result of Shingrix global expansion and new product launches, including its new RSV vaccine.
Management also said the company is making good progress in strengthening its early-stage pipeline. It believes this will support growth in the second half of the decade.
Overall, Q3 results were quite encouraging, to my mind.
And it seems that a number of analysts share my view. Since the results, several brokers have raised their share price targets for GSK. For example, Credit Suisse has raised its target to 1,510p from 1,430p.
Valuation and dividend yield
Turning to the valuation, analysts currently expect GSK to generate earnings per share of 143p for 2023. This means that at the current share price, the forward-looking price-to-earnings (P/E) ratio here is only about 10. I think that’s a relatively attractive valuation.
As for the dividend, GSK expects to pay out 61.25p per share for 2022. At today’s share price, that translates to a yield of about 4.4%. I see that as attractive too.
Overall, I think the stock looks quite tempting at those metrics.
Key risks
There are a few risks here however, that make me a little hesitant to pull the trigger and buy the shares.
One is the hit-or-miss nature of the pharmaceuticals business. Developing medicines is a complex process that doesn’t always lead to success. Now that the consumer healthcare business is gone, group revenues could be more volatile.
Another is Zantac litigation. In December, a US judge dismissed thousands of lawsuits claiming that Zantac caused cancer. However, there is still some uncertainty here as claimants are appealing the decision.
Debt is a third issue. At the end of September, this stood at £18.4bn. I prefer to invest in companies that have low levels of debt as leverage can be a burden, especially when interest rates are rising.
My move now
Weighing everything up, I’m going to leave GSK shares on my watchlist for now. I do think the shares offer some value at present. However, I’m going to hold off on buying until I see debt reduced, and the Zantac issue put to bed.
