Is this FTSE growth superstar set to soar even higher on new drug results?

New drugs should significantly boost this FTSE stock’s earnings in my view. But even without them it looked very undervalued to me.

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FTSE 100 pharmaceutical giant GSK (LSE: GSK) has seen its shares rise 25% from their 12-month 11 July low.

But a sharply rising price does not mean there is no value left in a stock. It could simply be that the market is playing catch-up with the fair value of a company.

And it could well be that the share price still does not truly reflect that value. This is the case with GSK, in my view.

Promising new drugs pipeline

Its share price surged again in the past week following the results of its Shingrix shingles vaccine. Data shows the drug has 79.7% efficacy in participants aged 50 and above, six to 11 years after vaccination.

Shingrix sales had already increased by 17% in 2023 to £3.4bn even before these positive results.

This followed 7 March’s announcement that tests show its Blenrep drug helps extend life in plasma cell cancer patients. GSK is in the process of filing the results with the US authorities.

And these developments followed the US Food and Drug Administration fast-tracking its Arexvy respiratory syncytial virus vaccine for review. This would be the first vaccine available to help protect those aged 50-59 against the disease.

13 February saw Citigroup raise its recommendation on GSK to a ‘Buy’ for the first time in seven years.

Strong growth prospects

There is always a risk that one of GSK’s major product lines may fail. This could be costly, as it would be for any pharmaceutical firm. Another risk is legal action arising from negative side effects of a core product.

This said, its 2023 results showed revenue rising 3.4% to £30.3bn from 2022. Net income increased 11% to £4.93bn over the same period.

For 2021-2026, it 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.

Still undervalued?

Even before these latest positive announcements, GSK looked undervalued to me.

On the key price-to-earnings (P/E) ratio stock valuation measurement, it trades at just 13.6 against a peer group average of 24.4.

This is comprised of Bristol-Myers Squibb at 12.4, Merck KGaA at 22.7, Hikma Pharmaceuticals at 26.2, and AstraZeneca at 36.2.

So what would a fair price be? A discounted cash flow analysis shows GSK shares to be around 60% undervalued at their present price of £16.51. Therefore, a fair value would be around £41.28.

This does not necessarily mean that they will ever reach that price. But it confirms to me that they still look very undervalued, even after the recent share price rise.

GSK’s heavily discounted price in my view is one reason I would buy it today if I did not already own it. The other is its enormous growth potential.

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.

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