GSK’s (LSE: GSK) share price is down 28% from its 15 May 12-month traded high of £18.19. As a shareholder, this raises the question of whether I should sell, keep what I have, or buy more.
In my experience as a former investment bank trader and longtime private investor, this depends on three further questions. These are: why are the shares down, what are GSK’s earning growth prospects now, and are the shares undervalued?
Why has the stock price dropped?
A persistent underlying bearish factor in the shares has been potential litigation over its Zantac drug’s possible link to cancer.
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October saw GSK agree to pay up to $2.2bn to resolve 93% of the pending cases against it in the US. However, this still leaves the spectre of further legal action – and damages – as a key risk for the firm.
Another is any significant failure of any of its major products. For example, 26 June saw the US Centers for Disease Control and Prevention withhold its recommendation for GSK’s Arexvy vaccine for people under 60.
In its Q3 results released on 10 October, GSK cut its full-year 2024 vaccine sales forecasts. It now projects these to decrease year on year by a low-single-digit percentage. The previous estimate was low-to-mid-single-digit percentage growth.
What are the firm’s earnings prospects now?
In Q3, GSK’s turnover rose 2% to £8bn, making an 8% rise to £23.3bn year to date. Core operating profit increased by 5% to £2.8bn over the quarter, and 16% to £7.7bn over the year so far.
These numbers reflected strong sales for its Specialty Medicines division, which helped offset losses in its Vaccines operation.
Moreover, it has continued to strengthen its product pipeline, with 11 positive Phase III (final stage) trials year to date. Next year it plans to launch five major new drugs. And overall it has 71 vaccines and medicines in its pipeline.
According to the Q3 results, GSK remains on track to deliver its previous 2024 guidance. This is growth in turnover of 7%-9% and in core operating profit of 11%-13%.
It also maintains its 2024-2026 forecast for adjusted operating profit to rise at a compound annual rate of 11%+ on an annual sales rise of 7%+. By 2031, it expects sales of more than £38bn.
Is the stock undervalued?
On the key price-to-earnings (P/E) stock valuation measure, GSK currently trades at just 22.1. This compares to its close competitors’ average of 30.6 – so it is very undervalued on this basis.
But how much of a bargain is it exactly? A discounted cash flow analysis shows the stock is 73% undervalued at its present price of £13.05.
So a fair value for the shares is £48.33, although they may fall from their present price or go higher than that fair value. It all depends on company performance and market unpredictability.
So what will I do?
I bought the shares some time ago at a lower price than now, so I am happy with that position.
However, I am sorely tempted to buy more stock despite knowing that doing so would increase the average price of my holding.
This looks to me to be one of those occasions when a high-quality stock can be picked up at a low-quality price. And it may be that I do yield to that temptation.
