Despite being around an 18-month high, GSK’s share price looks cheap to me

GSK’s share price has risen over the past 18 months, but it still looks undervalued against its peers, and new drugs offer further growth opportunities.

| More on:

Image source: GSK plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

GSK’s (LSE: GSK) share price is around an 18-month high. But just because a stock has risen a lot does not automatically mean that it is overvalued. It could simply be that the company is worth more than it was before.

In fact, it could well be worth even more than the current share price reflects.

Undervalued compared to its peers

On the key price-to-earnings (P/E) ratio measurement, GSK currently trades at just 13.8 against a peer group average of 26.7.

This group comprises Bristol-Meyers Squibb at 12.6, Merck KGaA at 23.4, AstraZeneca at 33.1, and Hikma Pharmaceuticals at 37.9.

discounted cash flow analysis shows GSK shares to be around 59% undervalued at their present price of £16.66. Therefore, a fair value would be around £40.63.

This does not mean the shares will reach that price, of course. But it does underline to me that they look very good value.

Strong core business

GSK’s full-year (FY) 2023 results showed revenue at £30.3bn, up 3.4% from FY2022. Net income increased 11% over the same period – to £4.93bn. And earnings per share grew 9.9% to £1.22, from £1.11 in 2022.

GSK expects increases in 2024 in turnover (by 5%-7%), adjusted operating profit (by 7%-10%), and adjusted earnings per share (by 6%-9%).

For 2021-2026, it now expects a 7% compound annual growth increase for sales (against the previous 5%). Adjusted operating profit is forecast to grow more than 11% (versus 10% before) on the same basis.

By 2031, GSK now expects to achieve sales of more than £38bn. This is an increase of £5bn over the estimate given in 2021.

Major new products’ potential

There is always a risk in pharmaceutical stocks that one of their major product lines may fail. Given how much time and money goes into developing them, this can be a major setback.

Another risk in such stocks is of legal action arising from negative side effects on a core product.

Indeed, GSK has been on the wrong end of litigation surrounding its Zantac product. However, on 23 June last year, it announced that the lawsuits had been settled.

GSK has also been criticised in the past for having a relatively low new product pipeline. For example, it currently has 71 vaccines and specialty medicines now in clinical development. By comparison, its main UK rival AstraZeneca has 167.

However, 5 February this year saw GSK announce very positive results for its multiple myeloma drug, Blenrep. Trials showed a 59% reduction in the risk of disease progression or death from plasma cell cancer with the use of a Blenrep combination therapy.

On 6 February, it announced that the US Food and Drug Administration has fast-tracked a review for its respiratory syncytial virus vaccine Arexvy.

If approved, this would be the first vaccine available to help protect those aged 50-59 against the virus.

On 13 February, Citigroup raised GSK stock to a ‘Buy’ recommendation for the first time in seven years.

I am happy with my existing holding in GSK, which I was fortunate enough to buy at a much lower price. If I did not have this, I would buy the stock for its growth potential and because it still looks cheap, in my view. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in AstraZeneca Plc and GSK. The Motley Fool UK has recommended AstraZeneca Plc, GSK, and Hikma Pharmaceuticals Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could Premier African Minerals be a millionaire-maker penny stock?

Shares of Premier African Minerals (LSE:PREM) have crashed over the past year. Is this a golden opportunity for me to…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Which FTSE defence stock should I buy? Here’s what the charts say

FTSE shares like BAE Systems have been flying higher over the last couple of years as the geopolitical situation has…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Here’s why investors should consider buying Scottish Mortgage shares today

After a steady rise in recent times, this Fool thinks Scottish Mortgage shares could be worth considering. Here he explains…

Read more »

Young black man looking at phone while on the London Overground
Growth Shares

This FTSE 250 stock keeps blowing broker forecasts out of the water

Jon Smith considers the ever-increasing share price targets for a FTSE 250 stock that has risen by 120% in the…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Marks and Spencer shares could rise 29%, according to this broker

Marks and Spencer shares currently sport a P/E ratio of just 10, and one well-known City broker believes the company…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 of the best FTSE 100 beginner stocks to consider buying

The Footsie offers people just beginning their investment journey some of the best stocks to buy. Here are two to…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Here’s why the Aviva share price suddenly dived

The Aviva share price suddenly dropped by over 6% the other day. But there's a simple explanation for this sudden…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

With no savings, I’d listen to Warren Buffett to aim for long-term wealth

Warren Buffett looks for "1-foot bars" to step over, not "7-foot bars" to jump. Stephen Wright looks at what this…

Read more »