It’s true that GSK’s (LSE: GSK) share price has already risen 28% from its 11 July 12-month low of £13.13.
It’s also true, however, that just because a stock’s risen sharply doesn’t mean that there’s no value left in it. It could simply be that the company’s worth more now than it was before.
In fact, it could be worth even more than the current share price reflects.
In GSK’s case, I think this could well be true.
New cancer drug trial results
On 7 March it said tests now show its Blenrep drug helps extend life in plasma cell cancer patients.
In 2022, it was withdrawn from the US after it failed to demonstrate that it was better than existing treatments.
However, GSK plans to file the results of the new Blenrep tests with the US authorities shortly.
This followed news on 6 February that the US Food and Drug Administration has fast-tracked a review for its Arexvy respiratory syncytial virus vaccine.
If approved, this would be the first vaccine available to help protect those aged 50-59 against the disease.
On 13 February, Citigroup raised GSK stock to a ‘Buy’ recommendation for the first time in seven years.
Analysts there also said they expect peak risk-adjusted Blenrep sales of around £2.5bn.
Still undervalued against
Even before these latest two announcements, GSK looked undervalued compared to its peers.
On the key price-to-earnings (P/E) ratio measurement, it currently trades at just 13.8 against a peer group average of 25.3.
A discounted cash flow analysis shows GSK shares to be around 58% undervalued at their present price of £16.81. Therefore, a fair value would be around £40.02.
This doesn’t necessarily mean that they’ll ever reach that price. But it confirms to me that they still look very good value, even after the recent share price rise.
Core business also looks strong
There are risks, of course, in any business and GSK is no different. Product development is expensive in the pharmaceutical sector, so if one fails then it is a major setback.
Legal action is also common against pharmaceutical firms, with the Zantac litigation against GSK a case in point. However, on 23 June last year, GSK announced that the lawsuits had been settled.
This said, the company’s promising new drugs come on top of already excellent 2023 results, in my view.
Revenue rose 3.4% to £30.3bn from 2022, while net income increased 11% to £4.93bn over the same period.
For 2021-2026, it expects a 7% compound annual growth increase for sales (against the previous 5%). Adjusted operating profit is forecast to grow more than 11% (versus 10% before) on the same basis.
By 2031, GSK now expects to achieve sales of more than £38bn. This is an increase of £5bn over the estimate given in 2021.
Even before news of the new drugs, I thought GSK’s share price was set to soar, as it looked very undervalued against its peers. These new products may mean this happens quicker than I thought.
In either event, I am extremely happy to already have my holding in the stock at a much lower level. But if I did not have this I would absolutely buy the shares right now for the reasons mentioned above.
