Growth Portfolio Playoffs Round 2: Gilead Vs. Wolverine World Wide

Jan.13.14 | About: Wolverine World (WWW)

In the second round of the Growth Portfolio playoffs we have #9 seeded Wolverine World Wide Inc. (NYSE:WWW) taking on #1 seeded Gilead Sciences Inc. (NASDAQ:GILD). Wolverine World Wide is a designer, manufacturer and marketer of a range of casual footwear and apparel, performance outdoor footwear and apparel, industrial work shoes, boots and apparel, and uniform shoes and boots. Gilead is a research-based biopharmaceutical company that discovers, develops and commercializes medicines.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

GILD

29Oct13

0.52

0.48

2.78

2.72

WWW

08Oct13

1.16

1.03

0.72

0.71

Click to enlarge

Gilead is up 97.74% in the past year while Masco is up 64.23% excluding dividends (up 64.81% including dividends), and are beating the S&P 500, which has gained 25.62% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner which will go on to play in the next round of the playoffs for the Growth Portfolio Super Bowl and face General Motors Company (NYSE:GM).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Gilead carries a 1-year forward-looking P/E ratio of 22.9 which is fairly priced for the future right now while Wolverine's 1-year forward-looking P/E ratio of 19.22 is also currently fairly priced. Game One goes to Wolverine.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Gilead is currently at 0.76 based on a 1-yr earnings growth of 63.34% while Wolverine's1-yr PEG ratio stands at 1.49 with a 1-yr growth rate of 23.16%. Gilead beats Wolverine out in Game Two to even the series at a game apiece.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Gilead has a projected EPS growth rate of 63.34% while Wolverine sports a growth rate of 23.16%. Gilead manages to win Game Three and leads the series by a game.

Dividend Yield

Dividend yield is a no brainer; it must be had in a portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Unfortunately Gilead doesn't pay a dividend while Wolverine pays a yield of 0.72%. Wolverine is able to even the series at two games apiece.

Return on Assets

Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment. Gilead is showing a 13.8% efficiency rate on their assets while Wolverine is showing 3.6% efficiency. With this victory Gilead takes the lead in the series once again.

Return on Equity

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. Gilead proves their efficiency of managing their shareholders equity to be 29.4% while Wolverine sports a value of 13.8%! By winning this game Gilead clinches the series.

Conclusion

Although Wolverine lost against Gilead, Wolverine is still a great company with great long-term story. Both companies have excellent short-term and long-term earnings growth potential, hence the reason why they are in my growth portfolio. After beating Wolverine, Gilead will advance to the next round of the playoffs and play against General Motors .

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Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long GILD, WWW, GM, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.