Despite a 5% dip from its 18 February one-year traded high, GSK’s (LSE: GSK) share price has firmed over the past year.
Post-Haleon demerger, GSK is a cleaner, more predictable business with strong earnings growth drivers in vaccines and HIV.
But the stock is still valued way below many global pharma rivals, so where should it be trading?
Undervalued compared to peers?
GSK looks cheap on key stock measures against its competitors.
Its price-to-earnings ratio of 15 is bottom of this group, which averages 25.2. These firms comprise Merck KGaA at 18.3, Zoetis at 18.7, AstraZeneca at 30.7, and CSL at 33. So it looks very cheap on this basis.
It also looks a bargain on its 2.6 price-to-sales ratio, compared to its peer group average of 4. And the same is true of its 5.2 price-to-book ratio against its competitor average of 6.4.
‘Correct’ price?
Discounted cash flow (DCF) analysis identifies the price at which any stock should trade based on the underlying business’s fundamentals. It does this by projecting a firm’s future cash flows and ‘discounting’ them back to today.
Some analysts’ DCF modelling is more conservative than mine — depending on the variables used. However, based on my DCF assumptions — including a 7.2% discount rate — GSK shares are 54% undervalued at their current £21.68 price.
So, this implies a ‘fair value’ for the stock of around £47.13 — more than double where it trades now.
The difference between any stock’s price and its fair value is crucial for long-term investors’ profits. This is because share prices tend to converge to their fair value over time.
So the price-to-value gap for GSK shares suggests a potentially terrific buying opportunity to consider today if those DCF assumptions prove accurate.
Earnings growth drivers
The key to long-term gains on any company’s share price (and dividends) is sustained growth in earnings (‘profits’). A risk to GSK is any failure in one of its key products that could lead to litigation. Another is intense competition in the vaccines sector, which could squeeze its margins.
Nevertheless, analysts forecast its earnings will grow a solid 6% a year on average over the medium term at minimum. And this looks well supported by its recent results.
Core operating profit increased 7% year on year to £9.8bn, underpinned by disciplined cost control and improved mix. Core earnings per share climbed 8% to 172p, highlighting the benefits of GSK’s sharper post‑demerger focus. And turnover rose 4% year on year to £32.7bn, reflecting continued strength in vaccines and speciality medicines.
Together, these results underline operational momentum that should continue to drive earnings growth ahead.
My investment view
What makes GSK compelling to me is the blend of stability and potential, which is why I will buy more soon. In short, it is not just a business with reliable earnings but also catalysts that could drive a meaningful re‑rating.
Investors rarely get the chance to buy a global pharma at a price that assumes so little future progress. And with the company’s vaccines, HIV, and pipeline execution, the wider market will also have to reassess its valuation soon.
