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GSK‘s (LSE: GSK) share price is down 28% since the 15 May 12-month high of £18.19. As a stockholder, this raises the question of whether I should sell, keep what I have, or buy more.
In my experience as an investment banker and long-time private investor, this boils down to three other questions. These are: why are the shares down, what are the prospects for GSK’s earnings growth now, and are the shares overvalued?
Why did the stock price go down?
The ongoing bearish factor in stocks has been a strong case against it Zantac a possible link to cancer.
October saw GSK agree to pay up to $2.2bn to settle 93% of the pending lawsuits against it in the US. However, this still leaves the prospect of further legal action – and damages – as the company’s main risk.
Another is any significant failure of any of its major products. For example, June 26 saw the US Centers for Disease Control withdraw its recommendation for GSK’s. Arexvy vaccine for people under 60 years of age.
In its Q3 results released on 10 October, GSK cut its vaccine sales forecasts for the full year 2024. It now projects these to decline year-on-year by a low single-digit percentage. The previous estimate was low to mid-single digit percentage growth.
What are the company’s current earnings prospects?
In Q3, GSK’s profits rose 2% to £8bn, making it 8% up on £23.3bn year to date. Core operating profit rose 5% to £2.8bn in the quarter, and 16% to £7.7bn in the year to date.
The numbers reflected strong sales in its Specialty Medicines division, which helped offset losses in its General Medicines operation.
In addition, it has continued to strengthen its product pipeline, with 11 Phase III (final phase) trials in the year to date. Next year it plans to launch five major new drugs. It also has 71 vaccines and drugs in its pipeline.
According to Q3 results, GSK is still on track to deliver on its previous guidance for 2024. This is 7%-9% profit growth and 11%-13% core operating profit.
It also maintains its 2024-2026 forecast for adjusted operating profit to rise at a compound annual rate of 11%+ on annual sales growth of 7%+. By 2031, it expects sales of more than £38bn.
Is the stock undervalued?
On the stock’s key price-to-earnings (P/E) ratio, GSK currently trades at just 22.1. This compares to the nearest competitor’s average of 30.6 – so it’s not too undervalued on this basis.
But how much is the bargain really? A discounted cash flow analysis shows that the stock is 73% undervalued at its price of £13.05.
The fair value of the shares is therefore £48.33, although it may fall below its current value or even rise above that fair value. It all depends on the performance of the company and the unpredictability of the market.
So what will I do?
I bought shares in the past at a lower price than now, so I’m happy with that position.
However, I am very tempted to buy more stock despite knowing that doing so will increase the average price of my holdings.
This looks to me like one of those times when a high quality stock can be picked up at a low quality price. And I may be giving in to that temptation.
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