Will GSK Stock Rebound To Its 2022 Highs of $47?

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GSK: GlaxoSmithKline logo
GSK
GlaxoSmithKline

GSK plc stock (NYSE: GSK) trades at $38 per share, about 20% below its peak level of over $47 seen in April 2022. In contrast, its peer Bristol Myers Squibb stock (NYSE: BMY) saw a 48% decline over this period. GSK stock was trading at $43 in early June 2022, just before the Fed started increasing rates, and is now 12% below that level, compared to a substantial 45% gain for the S&P 500 during this period. In this analysis of GSK’s upside post-inflation shock, we capture trends in the company’s stock during the turbulent market conditions seen over 2022. We compare these trends to the stock’s performance during the 2008 recession.

Notably, GSK stock has underperformed the broader market in each of the last three years. Returns for the stock were 20% in 2021, -20% in 2022, and 5% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that GSK underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GSK face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, GSK looks like it has some room for growth. It is trading at 2.6x trailing revenues, compared to 2.9x average over the last four years.

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2022 Inflation Shock
Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how GSK stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

GSK and S&P 500 Performance During 2007-08 Crisis

GSK stock declined from $53 in September 2007 (pre-crisis peak) to around $28 in March 2009, as the markets bottomed out, implying it lost 48% of its pre-crisis value. It recovered to $43 in early 2010, reflecting a 54% rise between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

GSK’s Fundamentals And Financial Position

GSK’s revenue has risen at an average annual rate of 7.9% from £24.3 billion in 2020 to £30.3 billion in 2023, aided by its specialty medicines along with its HIV and immuno-inflammation drugs. The company is focused on development of vaccines for future growth, and it spun-off its consumer healthcare business – Haleon – in July 2022. GSK also saw its operating margin expand by over 500 bps to 24.2% in 2023, versus 18.8% in 2020.

GSK’s total debt declined from £27.2 billion in 2020 to £17.8 billion now, while its cash decreased from £6.2 billion to £4.1 billion over the same period. The company’s debt is around 29% of the company’s equity and its cash is around 7% of its assets, implying a good financial position.

Conclusion

The potential upside could be over 20% if the stock recovers from $38 currently to its pre-shock levels of $47. With the central bank’s efforts to tame runaway inflation rates helping market sentiments, we think GSK stock will likely see higher levels over time and rebound to its 2022 highs. The move in GSK stock will be driven by the developments around its pipeline. For now, the company faced a setback with the U.S. Centers for Disease Control and Prevention recently recommending GSK’s RSV vaccine — Arexvy – for adults 75 years and above. The vaccine can also be administered to those within the age group of 60 to 74 who have an increased risk of severe RSV due to medical conditions. This implies that the U.S. is now a relatively smaller market for Arexvy. [1]

Returns Jul 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 GSK Return -1% 3% -1%
 S&P 500 Return 1% 15% 145%
 Trefis Reinforced Value Portfolio 0% 7% 657%

[1] Returns as of 7/3/2024
[2] Cumulative total returns since the end of 2016

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Notes:
  1. GSK shares fall as US narrows age recommendation for RSV vaccines, Ian Johnston, Financial Times, June 27, 2024 []