GSK’s (LSE: GSK) share price is down 21% from its 15 May 12-month traded high of £18.19. This is despite the 5 February release of very strong 2024 results that pushed the stock up 7% on the day.
Such a price slide in recent months could indicate that the firm is fundamentally worth less than it was before. Or it may be that a major gap between the stock’s price and its fair value has opened. This could provide me with a terrific opportunity to lock in substantial value at a bargain-basement price.
To ascertain which it is, I ran the key numbers and looked more closely at what has been going on.
Why is the share price down?
I think ongoing legal action over GSK’s Zantac drug’s link to cancer is the key reason for the price drop.
It agreed last October to pay $2.2bn to resolve 93% of the relevant cases in the US. But further lawsuits are pending and remain a key risk for the firm.
Shortly after this, the negative tone for the share price was compounded by a cut in GSK’s 2024 vaccine sales forecasts.
And in December, the US Food and Drug Administration de-authorised its Sotrovimab Covid antibody-based drug for emergency use.
How were the 2024 results?
Total sales in 2024 increased 7% year on year to £31.376bn. Over Q4 they rose 4% to £8.117bn, easily surpassing analysts’ consensus forecasts of £7.75bn.
Full-year operating profit jumped 11% to £9.148bn, while earnings per share (EPS) leapt 10% to 159.3p. Over Q4, EPS was 23.2p, again outpacing consensus analysts’ forecasts of 19.01p.
Overall, the loss in vaccine sales flagged by the firm was more than offset by major rises elsewhere. Specifically, vaccine sales fell 4%, while respiratory/immunology jumped 13%, its specialty medicines unit increased 19%, and oncology soared 98%.
In my view, Q4’s $1.15bn acquisition of US biotech firm IDRx was positive as well. This is part of GSK’s strategic shift towards gastrointestinal cancers to further compensate for a declining vaccine business.
The 2024 results also saw the firm increase its 2025 sales growth target to 5% against analysts’ previous expectations of 3.5%.
It also lifted its 2031 sales target to £40bn+ from £38bn+.
Analysts forecast GSK’s earnings will increase by 18.26% each year to end-2027. And it is earnings growth that ultimately powers a company’s share price (and dividend) higher.
So, are the shares undervalued right now?
On each of the three relative pricing measures I most trust, GSK is extremely undervalued against its competitors.
It trades at a price-to-earnings ratio of 22.9 compared to a peer average of 29.7. On the price-to-book ratio, it trades at 4.3 against its peer average of 6.7. And on the price-sales ratio, it is at 1.9 compared to a 5.9 average for its competitors.
To find out what all these mean in share price terms, I ran a discounted cash flow analysis using other analysts’ figures and my own.
This shows GSK shares are 65% undervalued at their present price of £14.38. So their fair value is technically £41.09, although they may go lower or higher due to market unpredictability.
Given these and the supporting factors, the shares look an irresistible bargain to me now and I will buy more very soon.
