GSK’s (LSE: GSK) share price is down 20% from its 15 May 12-month traded high of £18.19.
This sort of a drop could indicate that a bargain-basement buying opportunity is to be had. Or it could flag that the firm is fundamentally worth less than it was before.
I took a deep dive into the business and ran the key numbers to find out which is the case here.
How does the core business look?
One risk that could dent GSK’s future profits is further legal action connected to its Zantac drug or any others. Another is any sustained negative effect from 2 April’s US tariffs announcement.
However, the FTSE 100 giant’s 30 April Q1 2025 results saw turnover rise 4% year on year to £7.516bn. This was ahead of consensus analysts’ forecasts for £7.42bn.
Total operating profit surged 50% to £2.216bn, and total earnings per share jumped 56% to 39.7p. And cash generated from operations rose 16% to £1.301bn, which itself can be a major engine for growth.
The results document also highlighted that the firm is “well positioned to respond to the potential financial impact of sector-specific tariffs, should they be implemented”. More specifically, it underlined that it has identified options to mitigate any risks in its supply chain.
Overall, consensus analysts’ forecasts are that GSK’s earnings will grow 18% a year to the end of 2027.
Significant progress in several key new drugs is likely to drive this growth, in my view. GSK cited five major new US Food and Drug Administration approvals it expects this year. It also highlighted 14 key developments expected to launch between now and 2031. Each has a peak-year-sales potential of more than £2bn.
How undervalued is the stock?
My starting point in working out whether a firm is underpriced to its fair value is comparing its key stock measures to its competitors.
GSK’s 1.9 price-to-sales ratio is the bottom of its peer group, which averages 4.8. These firms comprise Merck KGaA at 2.5, AstraZeneca at 4, CSL at 5.1, and Zoetis at 5.1. So, it looks very undervalued on this basis.
The same is true of its 4.4 price-to-book ratio compared to its competitors’ average of 6.5. And it is also true of its 23.3 price-to-earnings ratio against its peers’ average of 26.
To put this information into share price terms, I use a discounted cash flow (DCF) analysis. This pinpoints the value of any stock based on future cash flow forecasts for the underlying firm.
The DCF for GSK shows its shares are a stunning 69% undervalued at their current price of £14.83. Therefore, their fair value is £47.84, although market unpredictability could move them lower or higher.
Will I buy more of the stock?
GSK is one of the very few shares I still hold that do not pay a very high yield. Currently it returns just over 4% a year, which is not bad but not the 7%+ I require.
The reason I have kept it is because of its very high earnings growth potential. It is this factor that ultimately powers a firm’s share price – and dividends – higher over time.
As nothing has changed here, I will buy more shares at the current knockdown price very soon.
