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Summary

  • Gilead's stock still has plenty of room to move up.
  • Gilead will continue to benefit from the success of its new Hepatitis C drug Sovaldi.
  • Gilead has compelling valuation metrics and exceptional earnings growth prospects; its PEG ratio of 0.41, is the lowest among all S&P 500 companies.

Although Gilead Sciences Inc. (NASDAQ:GILD) has significantly outperformed the market since the beginning of 2012, In my opinion, it still has plenty of room to move up. Gilead will continue to benefit from the success of its new Hepatitis C drug Sovaldi. Gilead has compelling valuation metrics and exceptional earnings growth prospects; its PEG ratio of 0.41, is the lowest among all S&P 500 companies. Furthermore, GILD's stock is ranked first among all S&P 500 stocks, according to Portfolio123's "Balanced2" powerful ranking system.

The Company

Gilead Sciences is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. The company strives to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions. Gilead was founded in 1987 in Foster City, California.

Valuation Metrics

The table below presents the valuation metrics of GILD, the data were taken from Yahoo Finance and finviz.com.

Gilead Sciences' valuation metrics are excellent; its Enterprise Value/EBITDA ratio is at 13.25. According to finviz.com, GILD's next financial year forward P/E is very low at 10.08, and the average annual earnings growth estimates for the next five years is extremely high at 24.67%; these give an exceptionally low PEG ratio of 0.41, the lowest among all S&P 500 companies. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio, because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Latest Quarter Results

On July 23, Gilead Sciences reported its second-quarter 2014 financial results, which beat analyst expectations by as much as $0.57 (31.80%) and also beat estimates on revenues.

Total revenues for the second quarter of 2014 increased to $6.53 billion compared to $2.77 billion for the second quarter of 2013. Product sales for the second quarter of 2014 increased to $6.41 billion compared to $2.66 billion for the second quarter of 2013. Net income for the second quarter of 2014 was $3.66 billion, or $2.20 per diluted share compared to $772.6 million or $0.46 per diluted share for the second quarter of 2013. Non-GAAP net income for the second quarter of 2014, which excludes acquisition-related, restructuring and stock-based compensation expenses, was $3.93 billion, or $2.36 per diluted share compared to $839.7 million or $0.50 per diluted share for the second quarter of 2013.

In the report, John C. Martin, PhD, Gilead's Chairman and Chief Executive Officer said:

During the second quarter, Gilead continued to make significant progress led by strong Sovaldi sales. Since December's launch, Sovaldi has been prescribed for more than 80,000 patients in the U.S. and Europe, underscoring the medical community's recognition of the benefits of this product. We look forward to making Sovaldi available in additional countries.

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Source: Gilead's Financial Tear Sheet

Dividend and Share Repurchase

Gilead is not paying dividends, however it has a share buyback program.

During the second quarter of 2014, Gilead generated $4.19 billion in operating cash flow. Gilead utilized $1.2 billion to repurchase 15.2 million shares during the quarter and has approximately $1.7 billion remaining in the current repurchase plan which is expected to be completed by September 2014. In May, the company announced that its Board of Directors authorized an additional repurchase of up to $5 billion of the company's common stock following completion of the current authorization.

Competitors

A comparison of key fundamental data between Gilead Sciences and its main competitors is shown in the table below.

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Gilead Sciences has a lower forward P/E and much stronger earnings growth prospects than its competitors. However, its EV/EBITDA is higher than that of the other companies in the group.

Gilead Sciences' Growth Rates parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.

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Source: Portfolio123

Ranking

According to Portfolio123's "Balanced2" powerful ranking system GILD's stock is ranked first among all S&P 500 stocks. The "Balanced2" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, and industry leadership, as shown in the Portfolio123's chart below.

Back-testing over fifteen years has proved that this ranking system is very useful.

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The GILD stock price is 2.38% above its 20-day simple moving average, 7.95% above its 50-day simple moving average and 18.18% above its 200-day simple moving average. That indicates strong uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.94 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 72.18 which indicate overbought conditions.

Analyst Opinion

Many analysts are covering the stock, and most of them recommend it. Among the twenty-six analysts, ten rate it as a Strong Buy, thirteen rate it as a Buy, and only three analyst rate it as a Hold.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering GILD stock there are sixteen analysts who have the four or five star rating, thirteen of them recommend the stock, and the other three have a Hold rating on the stock.

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Source: TipRanks

Major Developments

Main part of Gilead's revenue in the last quarter came from sales of the Hepatitis C drug Sovaldi. In fact, Sovaldi sales of $3.48 billion represented 53.3% of Gilead's total revenue of $6.53 billion. Gilead acquired Pharmasset, the developer of the drug, in November 2011 for $11 billion. The new $1,000-per-pill drug that was approved last December has become the treatment of choice for Americans with hepatitis C, a liver-wasting disease that affects more than three million.

Despite the success of Sovaldi to cure Hepatitis C, critics of the high U.S. pricing of Sovaldi ($84,000 for a typical 12-week treatment course), came from the health insurance industry and two senators. Senators Wyden and Grassley said that the initial developers of Sovaldi considered pricing it at less than half as much.

According to Associated Press, Gilead vice president Gregg Alton recently addressed the issue at a public forum sponsored by the American Enterprise Institute:

To suggest that a cure for a disease like hepatitis C should be priced at $36,000 ... would put a huge disincentive on investing in cures for our industry.

Gilead took on most of the challenge - and risk - of getting government approval for Sovaldi, Alton added. He suggested another standard for measuring the value of Sovaldi, something called "cost-per-cure," that makes Sovaldi look like a bargain. The older hepatitis C treatments take longer and are less effective, and Alton estimated their cost-per-cure at somewhere between $150,000 and $200,000. Included are companion drugs that patients must also take.

In my opinion, Gregg Alton's argumentation is quite convincing, and I believe that Gilead will continue to benefit from strong sales of the drug.

Gilead's stock has significantly outperformed the market in the last years. Since the start of the year, GILD stock has gained 21.8% while the S&P 500 index has risen 4.2%, and the Nasdaq Composite Index also has increased 4.2%. Moreover, since the beginning of 2012, GILD stock has recorded an astounding gain of 347.0%, while the S&P 500 index has increased 53.1%, and the Nasdaq Composite Index has risen 67.1%. Nevertheless, considering its compelling valuation metrics and the exceptional earnings growth prospects, the stock, in my opinion, is still cheap.

Conclusion

As one of the world's largest biopharmaceutical companies, Gilead Sciences will continue to benefit from the success of its new Hepatitis C drug Sovaldi. Gilead Sciences has compelling valuation metrics and exceptional earnings growth prospects; its PEG ratio of 0.41 is the lowest among all S&P 500 companies. Furthermore, GILD's stock is ranked first among all S&P 500 stocks, according to Portfolio123's "Balanced2" powerful ranking system. All these factors bring me to the conclusion that GILD stock still has plenty of room to move up.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in GILD over the next 72 hours. 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.

Source: Why Gilead Sciences Is Still A Great Investment Opportunity