I’ve long argued that the GSK (LSE:GSK) share price is undervalued compared to its peers. And despite the FTSE 100 company taking off since early December, I still think its shares still look dirt cheap today. It currently changes hands at £16.70 per share.
In fact, based on current earnings forecasts, it seems to be undervalued by around a quarter of its current share price. I’m thinking of adding it to my stocks portfolio when I next have spare cash to invest, and here’s why.
An industry bargain
GSK shares don’t just look cheap compared with the broader FTSE 100. The pharma giant also looks like a bargain compared with the drugs industry’s other big hitters. The price-to-earnings (P/E) ratios of these UK, US and European businesses can be seen below:
Company
Forward P/E ratio
AstraZeneca
14.7 times
Merck
14.6 times
Pfizer
12.3 times
Roche
12 times
Johnson & Johnson
14.7 times
AbbVie
15.5 times
Like GSK, these six businesses are all on the list of top 10 global pharmaceuticals developers by revenue. Based on current profit forecasts, they carry an average P/E multiple of 14 times.
This reading is well ahead of GSK’s forward-looking reading of 10.4 times. In fact, none of these businesses boasts a lower earnings multiple than the Cambridge firm.
GSK shares would need to be trading at £22 per share to reach that industry average of 14 times. This suggests the business is undervalued by 24%.
Turning the corner
One reason for the company’s attractive valuation reflects recent concerns over its drugs pipeline. Analyst Adam Vettese of eToro has previously said its disappointing share price performance in recent years is about “fears GSK hasn’t got enough knockout medicines and vaccines in the pipeline to sustain it over the next decade.”
However, the Footsie firm is ramping up R&D investment to yield the next generation of blockbuster drugs. This increased a further 13% in 2023, to £6.2bn.
And promisingly, these huge sums are beginning to bear fruit. It had 71 vaccines and medicines in clinical development at the end of 2023, with 18 at the Phase III testing or registration phase.
It also banked regulatory approvals for a cluster of potential blockbuster drugs last year, including for respiratory treatment Arexvy and HIV preventer Apretude.
Why I’d buy GSK shares
I’ve been looking for ways to invest in the pharmaceuticals sector for some time. This sector is tipped for strong growth in the coming decades as the global population rises and healthcare investment in emerging markets takes off.
Amid signs that it’s turning the corner, I think buying GSK shares could be a great way to gain exposure to this market. It has an excellent record of getting its products from lab bench to pharmacy shelf. And it has considerable financial firepower it can deploy to boost growth (as illustrated by its $1.4bn takeover of respiratory specialist Aiolos Bio last month).
And as I have shown, GSK’s share price seems to offer blistering value today even though it still has further room for improvement on the R&D front. I think it might be too cheap for me to miss.
The post At £16.70, I think this FTSE 100 stock could be 24% undervalued! appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca Plc and GSK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
