I believe that FTSE 100 giant GSK (LSE: GSK) could be an excellent value stock right now. Here’s why.
Pharmaceutical giant
As a quick reminder, GSK is a British multinational pharmaceutical and biotechnology business. In fact, it is one of the biggest pharma companies in the world. It develops, tests, and sells medicines to treat all types of ailments and diseases.
Let’s take a closer look at GSK’s recent share price activity. As I write, the shares are trading for 1,319p. At this time last year, they were trading for 1,760p, which is a 25% drop over a 12-month period.
I’m not concerned by GSK’s drop in share price but it’s important to understand why they have fallen. To start with, many FTSE 100 stocks have fallen due to macroeconomic volatility linked to inflation and interest rates rising. GSK isn’t the only value stock I like the look of due to the recent market volatility.
In addition to this, GSK has been involved in a court case surrounding one of its products, Zantac, but that has now concluded after a settlement was reached last month.
Why I rate GSK shares
Due to the GSK share price falling, I believe the opportunity to pick up cheap shares in a quality business is too good to miss. This is evidenced by GSK’s current price-to-earnings ratio, which sits at close to 10. This is below the market and industry average.
Identifying a value stock doesn’t just mean it is cheap. I always look at ensuring that the stock in question, GSK in this case, has the ability to perform, provide me with returns, and grow in the future. GSK ticks these boxes for me. The business has an excellent backlog of medicines and treatments awaiting approval. If successful, these should help growth and future performance too.
Speaking of growth, GSK has a reputation for acquisitions, which means it is looking to buy businesses to supplement its offering. It is worth remembering that not all acquisitions are successful.
Finally, while I expect GSK shares to bounce back in the future, I’m also excited at the passive income opportunity. Its current dividend yield stands at 4.4%. I am aware that dividends can be cancelled at any time at the discretion of the business.
A value stock I would buy
Despite my bullish view on GSK, I must note some real risks that threaten growth and returns.
Firstly, GSK is no stranger to lawsuits and litigation in regards to its products. These can impact the bottom line and investor sentiment too.
In addition to this, GSK operates in a competitive market with many other big pharma companies vying to create groundbreaking treatments. Losing any market momentum to competitors could also impact performance, returns, and investor confidence. For example, competitor AstraZeneca has a much bigger backlog of products awaiting approval.
Overall I like the look of GSK shares and consider them cheap at present with good prospects for growth and returns. I would be willing to buy some shares if I had the spare cash to do so.
