GSK’s (LSE: GSK) share price has traded in an unusually wide range for it over the past year. It recorded a 12-month high of £18.19 on 15 May. And since then hit a one-year low of £13.05 on 18 November. Currently, it is much nearer that low than the high, at just £13.58.
This scale of the loss – 25% at present – flags the possibility to me of a bargain buying opportunity. New shares at such a low price could add value to my existing holding in GSK.
But I need to check that there is value in the stock. Such a fall could also indicate that the company is simply worth less than it was before or that the market is catching up to the true value of the shares.
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Are the shares undervalued right now or not?
The first part of my pricing assessment compares GSK’s key valuations with those of its competitors.
On the price-to-earnings ratio, it trades at just 21.6 – bottom of its peer group, which averages 29.1. This comprises Merck KGaA at 22.8, both Zoetis and AstraZeneca at 31, and CSL at 31.4. So, GSK looks very undervalued on that basis.
The same is true on the key price-to-book and price-to-sales ratios. On the former, GSK currently trades at 3.9 against a competitor average of 6.6. And on the latter, it is presently at 1.7 compared to a 5.2 average for its peers.
The second part of my pricing assessment examines where GSK shares should be, based on future cash flow forecasts. This discounted cash flow analysis shows the stock is 70% undervalued at its current £13.58 price.
Therefore, the fair value of the stock is technically £45.27. Market unpredictability may move it lower or higher than this. But it underlines to me that the stock is absolutely packed with value right now.
How does the core business look?
A steady trickle of bad news has weighed on GSK’s share price over the past 12 months.
Ongoing litigation over its Zantac drug’s link to cancer is one. And this remains a primary risk for the firm, in my view.
The 23 December US Food and Drug Administration’s de-authorisation of for four Covid antibody-based drugs for emergency use is another. This includes GSK’s Sotrovimab.
That said, there have been several positive developments as well. The major one in my view is the $1.15bn acquisition of US biotech firm IDRx announced on 13 January.
It is part of the firm’s strategic shift towards gastrointestinal cancers to compensate for a declining vaccines business.
Factoring in all positive and negative factors to date, analysts forecast GSK’s earnings will increase 20.7% each year to end-2027. And it is this growth that ultimately drives a firm’s share price (and dividend) higher.
Will I buy more shares?
Currently, the yield on GSK shares is 4.3%. But analysts’ forecast it will rise in 2025 to 4.8% and in 2026 to 5.2%. These return rates compare favourably to the FTSE 100 average of 3.6%.
And the stellar earnings growth projections should also drive the share price much higher, in my view.
As such, I will be buying more GSK stock very soon.
