GSK (LSE:GSK) shares are up 18.9% over six months. And much of that growth has come in the past month.
So if I had invested £1,000 in GSK stock six months, today I’d have £1,189, plus about £10 in the form of dividends — paid on 11 January.
That’s clearly a pretty successful investment. However, is this the start of a sustained rally, or just market volatility? Let’s explore.
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Litigation
GSK stock has struggled in recent years due to litigation surrounding the discontinued heartburn Zantac drug. In 2019, concerns surfaced about potential cancer risks associated with an impurity found in Zantac and similar ranitidine drugs.
GSK’s stock has been volatile since then, experiencing both dips and rises as legal developments unfold. Recent settlements have helped boost the stock price somewhat.
However, the litigation surrounding Zantac is ongoing, with potential liabilities for GSK still to be determined. This uncertainty hangs over the company and its stock performance, and this remains a risk.
Improving performance
Of course, litigation isn’t the only thing impacting the GSK performance. In fact, since its split from its consumer health division — now Haleon — the company has performed rather well.
The latest quarterly results from GSK reveal an impressive double-digit growth in sales and profits. In turn, this underscores the company’s robust financial strength as well as its commitment to growth.
Excluding pandemic-related solutions, sales surged by 16% to reach £8.1bn. Meanwhile, adjusted operating profit saw a remarkable 22% increase to £2.8bn.
More specifically, investors were excited by the highly successful launch of the RSV (respiratory syncytial virus) vaccine, Arexvy. The vaccine performed extraordinarily well within its first year, with projected sales expected to surpass £1bn.
To date, Arexvy has delivered £700m in revenue, and this contributed to a booming vaccines segment, which was up 33% at Q3.
Of course, there are concerns, including the non-renewal of Blenrep — a monotherapy treatment for adult patients with relapsed or refractory multiple myeloma — in Europe.
In turn, this could present a challenge for the oncology business.
Cheap, but why?
From a quantitate perspective, GSK looks rather attractive. It trades at 10.3 times forward earnings, putting it at a discount of 64.9% to the sector.
And this top-grade valuation is present when we look at other metrics, including the EV-to-EBITDA ratio at 7.6. In turn, representing a 43.6% discount to the sector.
However, there are two things these metrics don’t take into account. The first is the ongoing litigation procedures and the impact this could have on future profitability.
And the next is growth. When we look at the price/earnings-to-growth (PEG) ratio, which sits at 2.11, we can see that this may be an issue. This metric, which is earnings adjusted for growth over three-to-five years, only suggests companies are undervalued if the ratio is below one.
However, I believe the earnings growth consensus for this stock is a little conservative. So maybe that PEG ratio should be a little lower — probably not below one.
Personally, I’m not buying GSK shares today, but I may be tempted in the future when the Zantac situation becomes clearer.
Despite the risks associated with the court cases, it could be a good stock to buy and forget about for 10 years. After all, pharma is a buoyant sector.
