In the semi-finals round of the Growth Portfolio playoffs we have #1 seeded Gilead Sciences Inc. (GILD) taking on #4 seeded General Motors Company (GM). General Motors designs, builds and sells cars, trucks and automobile parts globally. Gilead is a research-based biopharmaceutical company that discovers, develops and commercializes medicines.
The following table depicts the recent earnings reports for each company:
($ in billions)
($ in billions)
Gilead is up 100.82% in the past year while GM is up 27.14%, and are beating the S&P 500, which has gained 24.91% 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 for the Super Bowl against Polaris (PII).
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 23.76 which is fairly priced for the future right now while GM's 1-year forward-looking P/E ratio of 8.33 is also currently inexpensively priced. Game One goes to GM.
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 0.78 based on a 1-yr earnings growth of 64.92% while GM's 1-yr PEG ratio stands at 0.45 with a 1-yr growth rate of 36.52%. GM beats Gilead in Game Two and takes a two game lead in the series.
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 64.92% while GM sports a growth rate of 36.52%. Gilead manages to win Game Three and pulls within a game in the series.
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 does not pay a dividend while GM just initiated a dividend at a yield of 3.11%. GM is able to win Game Four and pulls within a game of clinching the series.
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 GM is showing 3% efficiency. With this victory Gilead stops GM from taking advancing to the Super Bowl.
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 GM sports a value of 17.1%. By winning this game Gilead pushes the series to the seventh and final game.
Return on Investment
ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI 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 higher the ROI value the better. Gilead came out slugging in the decisive game with an ROI of 16.9% while GM was only able to muster a value of 10.1%. With this victory Gilead is able to advance into the next round of the playoffs in a hard fought seven game series against GM.
Although GM lost against Gilead, GM is still a great company with a 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 GM, Gilead will advance to the Super Bowl and play against Polaris.
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!