Over the past five years, AstraZeneca has soared while the GSK (LSE: GSK) share price has gone nowhere.
That period does cover the Covid pandemic, when AstraZeneca became one of the top vaccine stars. But is GSK now the better buy? I think it is, and I’ll tell you why.
Third quarter
GSK posted Q3 results on 1 November.
The firm is big in vaccines, even it it didn’t catch the Covid headlines. Vaccine sales in the quarter rose 33%.
GSK has launched the world’s first vaccine, Arexvy, for the respiratory virus RSV. And that gave it a nice boost.
Overall, total Q3 sales rose by 10%, and by 16% excluding Covid products. Adjusted earnings per share for the year to date gained 11%.
The firm lifted its full-year adjusted EPS growth outlook into the 17%-20% range, from 14%-17%. And it expects to pay a 56.5p full-year dividend.
Long-term outlook
So, how did the GSK share price react? With a 1.7% drop by midday. It seems you just can’t please the market these days.
And as if to rub it in, AstraZeneca shares are up a fraction at the time of writing.
GSK CEO Emma Walmsley says: “GSK’s longer-term outlook also continues to strengthen, with progress in our vaccines pipeline, the development of our ultra long-acting HIV portfolio and significant new prospects in respiratory“.
So what do the valuations of the FTSE 100’s big two pharma stocks look like?
Twice the value?
AstraZeneca is currently valued at a price-to-earnings (P/E) ratio of way more than twice that of GSK shares.
Broker forecasts put AstraZeneca on a multiple of almost 28, against GSK’s measly 10.
With the share price disjoint, the dividend yields don’t line up. AstraZeneca is on a modest 2.3%, while GSK’s just-announced figure would yield 4%.
To counter that, AstraZeneca’s earnings growth forecasts are ahead of GSK’s.
My choice
The City expects AstraZeneca earnings to grow by 54% between 2023 and 2025. Over at GSK, the mooted growth is just 11%.
Still, even if they’re right, that would still leave AstraZeneca at around twice the valuation by 2025, on a P/E of 18.
As it happens, I do think that could make the stock good value now. It’s certainly not outrageous for a growth stock.
But by 2025, we’d see the P/E at GSK drop to around nine, if earnings forecasts are accurate. And that just seems crazy cheap to me, for one of the world’s top pharma firms.
Too good to be true?
There is one key risk with GSK right now, which I’m sure affects its stock valuation.
It faces a number of lawsuits in the US over claims made against its heartburn medication Zantac. GSK refutes the claims, has settled a few lawsuits already, and others have been thrown out.
But the costs of fighting litigation could keep investors away from the GSK shares for a while yet.
Still, even with that, GSK is on my list of long-term buy candidates.
