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FTSE 100 pharmaceutical giant GSK (LSE: GSK) is down 10% from its 10 September 12-month high of £16.77.
One reason for this is the possibility of further tariffs imposed by the US on pharmaceutical imports. This has not happened so far, but it does remain a risk for the firm.
That said, GSK highlighted in its 30 April Q1 results that it has identified options to mitigate any supply chain risks.
Also negatively affecting the share price has been litigation connected to the alleged side effects of its Zantac drug. The firm agreed last October to pay $2.2bn to resolve 93% of the relevant cases in the US. However, a risk of further legal action remains.
Having said all this, it may be that the drop in the stock’s price means a bargain-buying opportunity. I took a closer look to find out if this is true.
Are the shares a bargain?
On the price-to-sales ratio, GSK at 1.9 looks very undervalued against its peers’ average of 4.9. These firms comprise Merck KGaA at 2.4, AstraZeneca at 4.1, CSL at 5.1, and Zoetis at 8.
It also looks very cheap at a price-to-earnings ratio of 19.4 compared to a competitor average of 26.2.
And it also looks a major bargain at a price-to-book ratio of 4.3 against a 6.8 peer group average.
I ran a discounted cash flow analysis to put these valuations into a share price context. This shows where any stock price should be, based on cash flow forecasts for the business.
The DCF for GSK shows its shares are technically a whopping 64% undervalued at their present price of £15.12.
Therefore, their fair value is £42, although they may never reach that price.
What’s the business outlook?
Any firm’s stock price (and dividends) are driven over the long term by earnings growth. Earnings are revenue minus all expenses.
In GSK’s case, consensus analysts’ forecasts are for its earnings to increase every year by a strong 15.4% to end-2027.
These projections look well-founded to me. Its revenue rose 4% year on year in Q1 to £7.516bn. This outstripped analysts’ forecasts for £7.42bn.
Over the same period, profit surged 50% to £2.216bn, and total earnings per share jumped 56% to 39.7p.
Finally, cash generated from operations – which can be a major driver for growth in itself – increased 16% to £1.301bn.
The quarter saw major new approvals from the US Food and Drug Administration. These included its Penmenvy meningitis vaccine and its Blujepa antibiotic for urinary tract infections. The firm expects approvals this year for its Nucala COPD treatment, Blennrep multiple melanoma drug, and Depemokimab asthma treatment.
GSK announced another positive development last Friday (13 June) from the European Medicines Agency. It has accepted the firm’s application to expand the use of its respiratory syncytial virus vaccine Arexvy to adults aged 18+.
It also anticipates 14 key developments between now and 2031 that each have peak-annual-sales potential of £2bn+.
Will I buy more of the shares?
GSK’s product pipeline and earnings growth forecasts look set to power its share price and dividends higher to me.
Given how low its share price is in comparison to its fair value, I think this could be a very long way indeed.
Consequently, I will buy more of the shares to add to my existing holding very soon.
