What’s going on with the GSK share price as Q1 profit falls?

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The GSK (LSE:GSK) share price has performed rather well in recent months, and this strong performance is likely to continue following the company’s Q1 report. Let’s take a closer look.

Q1 profits fall

On Wednesday (1 May), GSK announced its results for the first quarter, and it was a mixed bag. The British pharma giant said sales rose 10% to £7.4bn but total operating profit fell 18% to £1.49bn. The company blamed falling operating profit on higher charges relating to contingent consideration liability (CCL).

However, on a positive note, the company raised its guidance for the year. And the market likes it when firms do that. GSK said it had raised its guidance on the back of strong sales across all products, especially vaccines and speciality medicines.

Positive catalysts

It also pointed to a successful royalty dispute over Zejula — a treatment for advanced ovarian cancer — that boosted results for the quarter and will likely contribute strongly to income for the year.

In addition to the above, GSK pointed to some more positive catalysts. CEO Emma Walmsley noted four pipeline products that had delivered strong results in phase three trials and were positively contributing to prospects within its infectious diseases, HIV, respiratory/immunology and oncology businesses.

Moving forward, GSK expects 2024 turnover growth towards the upper end of its 5% to 7% range, and core operating growth between 9% and 11%. That’s up from 7% to 10% as previously stated. Earnings per share guidance was also moved from 6% to 9% up to 8% to 10%.

Is the stock good value?

There are several ways to work out how much a company’s stock should be worth. But it’s often worth starting off by looking at analysts’ forecasts, and the consensus of all analysts covering the stock.

The average target price for GSK is £20.07, and that’s around 16.9% above the current share price. That’s a good sign. There are currently 12 Buy ratings, six Hold ratings, two Underperform ratings, and one Sell rating — also positive.

Of course, there’s something to bear in mind here. Analysts don’t update their share price targets all the time. So, they can get outdated quickly, especially if a company raises its guidance in the meantime. It can often be prudent to discard analysts’ ratings that are more than three months old.

From a valuation perspective, GSK certainly doesn’t look expensive at 15.4 times forward earnings. Companies in this sector tend to trade at high multiples given the promise of their R&D pipelines and long-term demand for vaccines, medicines, and healthcare.

However, this attractive valuation also reflects the fact that GSK is still battling lawsuits concerning Zantac, a heartburn drug, that plaintiff’s claim caused cancer. GSK remains adamant that the drug doesn’t.

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James Fox has no positions in any of the companies mentioned. The Motley Fool UK has recommended GSK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.