GSK’s (LSE: GSK) share price is down 19% from its 15 May one-year traded high of £18.19.
This could flag that a business is fundamentally worth less than it was before. Or it could highlight a bargain-basement buying opportunity to be had.
I think it is the latter in this case for three key reasons.
Strong earnings growth
It is ultimately earnings growth that determines the trajectory of a firm’s stock price (and dividend) in the future.
In GSK’s case, analysts forecast that its earnings will increase an extremely robust 18.3% a year to end-2027.
Its 2024 results certainly showed a strong foundation for such growth, in my view. Sales jumped 7% year on year to £31.376bn, while operating profit leapt 11% to £9.148bn. Earnings per share increased 10% to 159.3p.
The pharmaceutical giant also lifted its 2031 sales target to £40bn+ from £38bn+.
Extreme share price undervaluation
GSK’s 1.9 price-to-sales ratio looks extremely cheap against the 4.9 average of its competitors. These comprise Merck KGaA at 2.6, AstraZeneca at 4.2, CSL at 5.1, and Zoetis at 7.9.
The same is true of its 23.4 price-to-earnings compared to its peer group’s 27.3 average.
And it also looks a steal on the price-to-book ratio. Here it trades at 4.4 against the 6.7 average of its competitors.
I ran a discounted cash flow analysis to ascertain where it should be priced based on future cash flow forecasts. This shows GSK shares are a stunning 66% undervalued at their present £14.72.
So the fair value for the stock is technically £43.29, although share prices are unpredictable and it may never reach that level.
New product approvals
A risk to GSK is legal action arising from the alleged ill effects of one of its products.
Lawsuits against its Zantac drug have hung over the firm’s share price for some time now. However, it was agreed last October to pay $2.2bn to resolve 93% of the relevant cases in the US.
That said, 2024 saw a 98% year-on-year rise in sales of its oncology products. Specialty medicines sales jumped 19% and those of respiratory/immunology products increased 98%.
Positive as well were new approvals for several GSK drugs. In March alone, the US Food and Drug Administration approved Blujepa for the treatment of uncomplicated urinary tract infections.
And the European Medicines Agency approved the Nucala asthma drug for use in the treatment of chronic obstructive pulmonary disease.
Will I buy more of the stock?
I already have a sizeable holding in GSK based around its strong earnings growth potential. This will drive its share price – and dividend yield (currently 4.1%) – much higher over time, I think.
I also believe it is positioned in a sector that will only grow as the world’s population lives longer.
Some 1.4bn people will be aged 60+ by 2030 compared to 1bn now, according to figures from the World Health Organization. That will increase to 2.1bn by 2050, and by then the number of people aged 80+ will have trebled to 426m.
As older age brings declining health, the demand for medical assistance, including drugs, increases.
I, for one, fully intend to use every possible (legal) drug I can to keep going. So I might as well benefit financially along the way as well.
Consequently, I will buy more GSK shares very soon.
