GSK’s (LSE: GSK) share price has gained 20% from its 9 April one-year traded low of £12.42. One reason is the lack of extra US tariffs placed on UK pharmaceutical companies, as had been mooted. That said, this does remain a risk for the firm.
Another reason is the reduction in litigation risk surrounding its Zantac product, although again a risk remains. This followed the October 2024 $2.2bn (£1.63bn) settlement by GSK that resolved 93% of lawsuits related to the drug.
And I think the final reason has been very strong results from the company since its one-year low. These are forecast to continue to the end of 2027 at minimum.
I believe these will drive the firm’s share price much higher over that period. After all, it is profit growth that powers any firm’s stock price over the long term.
The recent results
Its Q1 2025 numbers released on 30 April saw total operating profit leap 50% to £2.216bn. Earnings per share jumped 56% to 39.7p. And cash generated from operations rose 16% to £1.301bn.
GSK also said it expects five major new US Food and Drug Administration approvals this year. It additionally anticipates 14 major product developments being launched between 2025 and 2031. Each has a peak-year-sales potential of more than £2bn.
Its Q2 figures were also excellent, with total operating profit soaring 33% to £2.023bn. Earnings per share bounced 35% to 35.5p. And cash generated from operations climbed 47% to £2.433bn.
The company underlined that it is “well positioned to respond to the potential financial impact of sector-specific tariffs, should they be implemented”.
As it stands, consensus analysts’ forecasts are that GSK’s profits will grow by an average 14.2% a year to end-2027.
The stock valuation
A share’s value reflects the fundamentals of the underlying business. Its price is whatever the market will pay at any given time.
It is in the difference between the two that big profits can be made over time, in my experience. This comprises decades as a private investor and several years as a senior investment bank trader before that.
The best method I have found to identify and quantify this price-valuation gap is discounted cash flow (DCF) analysis. This establishes where any share price should trade using cash flow forecasts for the underlying business.
In GSK’s case, the DCF shows its shares are 69% undervalued at their current £14.92 price.
Therefore, their fair value is £48.13.
My investment view
I have gradually reduced the number of relatively low-dividend-yield shares that I hold since I turned 50 a while ago.
This is because I want to increasingly use dividend income to enable me to keep reducing my working commitments.
In 2024, GSK paid a dividend of 61p, which gives a current yield of 4.1%. This compares well to the present FTSE 100 average of just 3.4%. However, it is nowhere near the 7%+ that several of my stocks deliver.
Despite this, not only am I continuing to hold GSK stock, but I am going to buy more very shortly.
The reason is that its strong profits growth should power both its share price and earnings much higher over time.
Indeed, in my experience asset prices converge to their fair value over time (although this is not guaranteed).
