FTSE 100 shares appeal to me because they’re backed by large, well-established businesses.
It’s even better if a Footsie company’s out of favour with a keen valuation.
Short-term challenges?
For example, biopharmaceutical business GSK’s (LSE: GSK) languishing on a cheap-looking rating but the forward-looking growth prospects of the firm look encouraging.
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One cloud over the company is the ongoing threat of litigation arising from its old product Zantac. The medication was used for reducing stomach acid. But some reckon the drug caused cancer.
Nevertheless, big biopharmaceutical companies are no strangers to law courts and litigation. In fact, many big firms from all kinds of sectors end up spending a lot of their time defending themselves from claims, or settling them.
However, Footsie businesses tend to be well-researched and followed by many City analysts. On top of that, large investment institutions often hold their shares.
One outcome of all that investment activity is the stock market’s rarely taken completely by surprise when Footsie firms report their trading results and news flow. So the rapid and large share price swings we often see with smaller companies tend not happen so much with the big FTSE 100 beasts.
My assumption is that much of the risk from litigation’s already in the share price with GSK. On top of that, any recent research & development (R&D) failures will also likely be priced in.
Plenty of potential to grow
GSK’s opportunity to grow its earnings and expand its business looks attractive. Perhaps one day the company may gain the kind of operational momentum demonstrated by its peer AstraZeneca over recent years.
In May, GSK posted a decent set of first-quarter results with an encouraging outlook statement.
Chief executive Emma Walmsley said the business made a “strong” start to 2024, with a quarter of “excellent” performance. The R&D pipeline delivered ongoing progress and has strengthened the prospects for growth in the firm’s key therapeutic areas.
Looking ahead, Walmsley expects the operational momentum to continue and deliver “meaningful” growth in sales and earnings during 2024.
I think that’s exciting. R&D progress was the thing that drove AstraZeneca’s business achievements over the past 12 or so years. But I can remember the company at the beginning of that period. It was unloved and on a low rating with everything still to prove regarding its R&D efforts.
Maybe GSK’s in a similar place today. City analysts are optimistic and have pencilled in low double-digit advances for earnings this year and next.
An undemanding valuation
Meanwhile, with the share price in the ballpark of 1,518p, the forward-looking price-to-earnings multiple is just below nine when set against those estimates. On top of that, the anticipated dividend yield’s just over 4%.
That’s cheap and reflects the risks. That litigation threat may gather momentum and end up costing the firm a lot of money. Or perhaps the R&D pipeline will produce a string of duds causing the business to miss its estimates.
Nevertheless, despite the uncertainties, I love this stock for its modest valuation and decent growth prospects. So I’d consider it for inclusion in a diversified portfolio focused on the long term.
