GSK shares look cheap. Should I buy them?

GSK (LSE: GSK) shares have taken a hit over the past six months. As a result, they look quite cheap now. I am interested in adding some more healthcare stocks to my portfolio. Should I buy GSK? Let’s have a look.

New GSK

After eliminating the consumer health division (Haleon) last year, GSK now works in two main areas – medicines and vaccines. The focus of R&D is on four therapeutic areas – infectious diseases, HIV, oncology, and immunology.

I am comfortable with this new looking structure. Having said that, I miss the stability that the consumer health division brought to the business.

sales growth

Moving on to business performance, GSK’s Q3 2022 results show the company’s current performance is quite good.

For the period, total sales rose 9% year-on-year to £7.8bn (up 7%, excluding Covid-19 products). Excluding this, Specialty Medicines are up 24% (+ 11%, excluding Covid solutions) while vaccines are up 5% (+ 9%, excluding Covid). On the back of these results, the group raised its guidance for 2022.

Looking ahead, management is confident about the future, saying it expects “good momentum” in 2023 as a result of Shingrix global expansion and new product launches, including a new RSV vaccine.

Management also said the company is making good progress in strengthening its early-stage pipeline. It believes this will support growth in the second half of the decade.

Overall, Q3 results are quite encouraging, in my mind.

And it seems that some analysts share my view. Since the results, some brokers have raised their stock price targets for GSK. For example, Credit Switzerland has raised its target to 1,510p from 1,430p.

Valuation and dividend yield

Turning to the valuation, analysts now expect GSK to generate earnings per share of 143p for 2023. This means that at the current share price, the expected price-to-earnings ratio (P/E) here is only about 10. I think that the price is relatively attractive. .

As for dividends, GSK expects to pay 61.25p per share for 2022. At the current share price, that translates to a yield of around 4.4%. I see that as very attractive.

Overall, I think the stock looks pretty tempting on these metrics.

The main risk

There are some risks here, however, that make me a little hesitant to pull the trigger and buy shares.

One is the hit-or-miss nature of the pharmaceutical business. Developing medicines is a complex process that does not always lead to success. Now that the consumer health business is gone, the group’s profits may be more volatile.

The rest is Zantac litigation. In December, a US judge dismissed thousands of lawsuits alleging Zantac cause cancer. However, there is still some uncertainty here as the prosecution is appealing the decision.

Debt is the third problem. At the end of September, it stood at £18.4bn. I prefer to invest in companies with low debt levels because leverage can be a burden, especially when interest rates rise.

I’m moving now

All things considered, I’m going to leave GSK stock on my watchlist. I think the stock offers some value right now. However, I want to continue to buy until I see the debt reduced, and so on Zantac problem put to bed.