Down 17%, does the GSK share price scream buy?

It has been far from a smooth journey for the GSK share price recently. But this Fool likes the look of the stock now that it is down nearly 20%.

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Image source: GSK plc

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It has been a turbulent 12 months for the GSK (LSE: GSK) share price. Back then it was trading for 1,316.6p. Today, it’s 1,509.9p, or 14.7% higher.

But that doesn’t paint the full picture. During that time, the stock has been on a roller-coaster ride. And shareholders have certainly had to brace themselves at points.

Right now, the stock is down around 17% from its 52-week high after a recent tumble. I’m sensing a buying opportunity.

An uncertain period

Before I explain why, it’s best to explore what’s been behind the volatility that its share price has been experiencing. There’s one main factor.

It’s down to potential litigation related to Zantac, a heartburn drug that was removed from the market in 2019 after being linked to cancer. While this has been ongoing for a few years, there have been a couple of developments this year.

The most recent update was the catalyst for its share price decline. A Delaware judge ruled in favour of more than 70,000 lawsuits related to the drug and its link to causing cancer going forward. Its share price slid around 11% on the back of the news.

It hasn’t got much better from there. Since then, the stock has continued on its spiral. It has lost a further 5.5% of its value despite GSK saying it will appeal and “vigorously defend itself” against the claims.

Valuation

Yet despite the uncertainty this creates, I think GSK looks like a bargain. Let’s start with its attractive valuation.

It currently trades on a price-to-earnings (P/E) ratio of 13.8 and a forward P/E of 10.3. I think that looks like good value. Its long-term historical average is closer to 15, suggesting there may be growing room in today’s share price.

What’s more, that’s below the global sector average. It’s significantly cheaper than its rival AstraZeneca, which is currently trading on a P/E ratio of 37.8.

Income

Its falling share price also translates to a meatier dividend yield. It pays out 3.9%, above the FTSE 100 average (3.6%). Last year its dividend payment rose 5.5% to 58p. The business has given 2024 guidance of a 60p dividend, a 3.4% rise.

Alongside its yield, I also like the stability it can provide over the long term as it’s a defensive stock. That may sound contradictory given its recent volatility. But with it providing essential needs, such as vaccines and medicines, this means it’ll always be in demand regardless of external factors such as economic uncertainty. We saw this last year when its revenue and earnings grew 3.4% and 11%, respectively.

I’d buy

I’m fully aware of the risk with Zantac, which is large. So much so that broker UBS recently downgraded its rating for the stock from ‘buy’ to ‘neutral’. These sorts of legal complications are a major risk when investing in pharmaceutical stocks.

But even so, despite downgrading the stock, UBS alluded to GSK having an attractive valuation, and that’s what’s drawing me in. On top of that, the major bank Citi put a ‘buy’ rating on the stock earlier this month.

I think now could be a smart time for investors to consider cheap GSK shares. If I had the cash, I’d happily buy the stock today.

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.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca Plc and GSK. 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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