Inflation is the big value killer right now, and it’s squeezing profit margins hard across the UK stock market. That’s one of the reasons why GSK (LSE: GSK) shares could be a good buy at the moment.
Inflation-resistant?
I see GSK as pretty much inflation-resistant. It doesn’t compete with lots of others selling the same products. And it doesn’t have to fight for retail business from people with less and less cash to spend.
No, GSK takes years to develop drugs, and it enjoys a monopoly on its successes, protected by patents.
Competitors, like AstraZeneca, can research their own drugs for the same ailments. But they can’t just come along and say” “Oh, that new GSK drug looks good, we’ll make and sell the same thing cheaper.”
Against that, drug development needs a lot of capital expenditure. And that’s not ideal when inflation is high. But GSK’s business cycle is a lot longer than most inflation cycles.
Quality company
GSK also strikes me as the kind of company that billionaire investor Warren Buffett might like.
What was it the boss of investing firm Berkshire Hathaway once said? Oh yes, that’s it:
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
For me, a wonderful company has a few key features. It must be a leader in its field. It should have barriers to entry that keep newcomers out. And it needs the financial muscle to stay ahead of the game.
I reckon GSK has all of these. Does some upstart threaten to muscle in with new technology? Well, GSK could have the clout to buy it out.
Attractive valuation
When it comes to valuation, I see plenty of shares on the UK stock market that look like much cheaper buys than this one. And there are some top value bargains to be had among them.
But is GSK’s valuation a fair one?
Profits have been solid. And forecasts show earnings growth in the next few years. It all puts the shares on a price-to-earnings (P/E) ratio of only around 10.
The Footsie is weak right now, so that might not look the same bargain as it could be in more bullish times. But for a company of its quality, I think it’s a buy sign.
The dividend should yield about 4.2%, and rising. And it should be more than twice covered by earnings.
Reasons not to buy
If I think these are good reasons to buy, what’s the risk? Well, the parmaceuticals business can be very cyclical, and GSK has had long periods in the doldrums in the past.
In fact, along with AstraZeneca, it’s only just emerging from a dry spell. Both companies suffered from the expiry of patents and increasing generic competition a few years ago.
In short, they need to keep researching and developing new drugs just to stand still.
And right now, I see quite a few wonderful companies at wonderful prices out there, GSK included. I just don’t have the money to buy them all.
