Gilead: 50% Upside From Here

| About: Gilead Sciences, (GILD)


Gilead Sciences has appreciated more than 20% over the past three months easily besting the performance of the S&P 500.

Despite the recent rally, this fast growing biotech concern is still significantly cheaper than the overall market.

The stock appears poised to post significant further gains and investors might want to add to positions in front of next week's earnings report.

My regular readers know that I am a huge bull on biotech Gilead Sciences (NASDAQ:GILD). Not only is the company the biggest position I own in this volatile sector, it is also the largest holding within my portfolio, which I recently detailed.

The shares have run up more than 20% over the past three months but still are substantially cheaper than the overall market despite the company delivering huge increases in earnings as well as its substantial growth potential to come.

I am circling back to the shares for two reasons. First, earnings are due to be reported. Given the company's recent history, results are likely to easily beat expectations so this might be the last time investors can get into or add shares to their existing holdings before the next stage of the stock's rally.

Second, Nomura took up its price target on Gilead yesterday from an already attractive $130 a share to $141 a share, which would be more than 50% upside from the current price of the stock. As importantly, some of the color provided by Nomura's four star ranked analyst provides why Gilead still has substantial gains ahead of it.

Nomura now believes that peak sales for the company's new Hepatitis C drug Sovaldi will reach $22B annually up from its previous estimate of $16B. To put this in perspective, Gilead paid just $11B for the company that developed Sovaldi back in late 2011. It also is the total amount of revenue the company should post this year (Sovaldi is ~50% of overall sales, the majority of the rest comes from the company's market share leading HIV franchise).

The investment bank also believes new two-drug and three-drug HCV combos will be launched in 2017 and 2018 further powering growth. Finally, Nomura believes Gilead's free cash flow will hit $13B next year (10% of its current market capitalization) and calls the company "most attractively priced large-cap growth stock in the healthcare industry."

What is amazing about Gilead is its valuation even after its recent rally. The stock sells for just over 13 times forward earnings even as the company more than tripled last year's earnings on the back of a doubling of revenue this year.

The market overall is going for ~16 times forward earnings and is nowhere in the vicinity of the growth that Gilead is experiencing. Gilead beat the consensus earnings expectations by over 60% last quarter incorporating the first months of Sovaldi's sales.

It seems likely the company will beat estimates once again even as analysts have significantly hiked their earnings forecasts since then. I think Nomura is right in hiking their Sovaldi sales bogey yesterday.

The company is marching to earnings of ~$6.60 a share this year. Putting a still conservative 20 times forward earnings on that number provides a price target of $132 a share on Gilead, a little more than 50% above the current stock price.

Investors should open their ears on this undervalued long term growth play. The noise they would hear is the sound of a horn up ahead coming from a train that is leaving the station. STRONG BUY

Disclosure: The author is long GILD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.