GSK’s (LSE: GSK) share price is down 14% from its 15 May traded high of £18.12.
The key reason for this I think is investor concern over the ongoing legal action alleging a link between its Zantac drug and cancer. On 31 May, a US court ruled that 70,000+ lawsuits can proceed to trial.
The potential for very high compensation awarded against GSK if these succeed remains the principal risk for the firm, in my view. However, 5 August saw a jury in Chicago find that the drug was not responsible for an Illinois woman’s cancer.
Although most of the 70,000+ ongoing lawsuits are in Delaware, this verdict looks encouraging for GSK.
It may also refocus the attention of investors on the excellent fundamentals of the firm, I think.
Robust growth ahead?
Its Q2 results released on 31 July showed total sales up 13% to £7.884bn, 5.2% more than analysts’ expectations.
Sales of General Medicines rose 12%, Specialty Medicines 22%, HIV medicines 13%, and oncology sales more than doubled to £0.4bn.
Given these numbers, GSK’s core operating profit leapt 18% and its core earnings per share (EPS) grew 13%.
They also prompted the firm to upgrade its guidance for this full year. Turnover is now expected to rise 7%-9% (from 5%-7%), core operating profit to 11%-13% (from 9%-11%), and core EPS to 10%-12% (from 8%-10%).
Are the shares undervalued?
The stock currently trades on the key price-to-earnings ratio (P/E) of stock valuation measurement at 15.4. This is the lowest among its competitors, which have an average P/E of 34.6.
This group consists of Merck KGaA at 26.9, Zoetis at 35.4, AstraZeneca at 37.9, and CSL at 38.3.
So, GSK looks very undervalued on this basis.
The same is true on the price-to-book ratio (P/B), where it trades at just 4.3 against a peer group average of 7.7.
And it is also bottom of the group on the price-to-sales ratio (P/S) stock valuation measure. It trades at only 2, with its competitors averaging 6.2.
So how cheap is it in hard cash terms? A discounted cash flow analysis shows the shares to be 73% undervalued at their present price of £15.65. So, a fair value would be £57.96.
They may go lower or higher than that, of course. However, it underlines to me what a huge bargain they appear right now.
Will I buy more?
A bonus in what I regard as basically a growth stock is the increased dividend announced in the Q2 results.
By the end of this full year, it will have paid 60p in total, versus 58p last year. On the current share price of £15.65, this would give a yield of 3.8% — better than the FTSE 100’s 3.7% average.
Additionally, based on future earnings projections, analysts forecast that the yield will rise to 4.2% and 4.5% in 2025 and 2026 respectively.
I bought my holding in GSK over several stages in recent years, all at much lower prices than now. So, I am very happy with that position.
However, if I did not have this, I would buy GSK shares now for their extreme undervaluation, high growth prospects and now also a decent yield!
The post After strong Q2 results and positive legal news, is GSK’s share price an unmissable bargain? appeared first on The Motley Fool UK.
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Simon Watkins has positions in AstraZeneca Plc and GSK. 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.
