What To Expect From Gilead Sciences' Earnings Report

| About: Gilead Sciences, (GILD)

Summary

Gilead is scheduled to report its fourth-quarter 2015 financial results on Tuesday, February 02, after market close.

According to 19 analysts' average estimate, Gilead is expected to post a profit of $2.99 a share, 23% rise from its actual earnings for the same quarter a year ago.

The fact that Merck gained FDA approval for its HCV drug should not have had an impact on Gilead's stock since it has been anticipated for a long time.

Considering its compelling valuation metrics and its high earnings growth prospects GILD's stock is extremely undervalued, the EV/EBITDA ratio is very low at 5.77.

The average target price of the top analysts is at $120.20, up 44.8% from the January 29 closing price, which appears reasonable, in my opinion.

Gilead Sciences (NASDAQ:GILD) is scheduled to report its fourth-quarter 2015 financial results on Tuesday, February 02, after market close. According to 19 analysts' average estimate, Gilead is expected to post a profit of $2.99 a share, a 23% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $3.31 a share while the lowest is for a profit of $2.68 a share. Revenue for the fourth quarter is expected to increase 11.1% year-over-year to $8.12 billion, according to 18 analysts' average estimate. There was one up revision during the last seven days and five EPS up revisions during the last thirty days. Since Gilead has shown significant earnings per share surprise in seven of its last eight quarters, as shown in the table below, there is a good chance that the company will beat estimates also in the fourth quarter.

Data: Yahoo Finance

Since the beginning of 2015, GILD's stock is down 11.9% while the S&P 500 Index has decreased 6.7%, and the NASDAQ Composite Index has lost 2.6%. However, since the beginning of 2012, GILD' has gained an astounding 312.5%. In this period, the S&P 500 Index has increased 52.8%, and the Nasdaq Composite Index has risen 77.1%. Nevertheless, considering its compelling valuation and high growth prospects the stock still has much room to grow, and the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price. According to TipRanks, the average target price of the top analysts is at $120.20, up 44.8% from the January 29 closing price, which appears reasonable, in my opinion.

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There is much skepticism in the market about Gilead's growth prospects, and it seems that many investors have lost their faith in the stock, which explains the 32.7% drop in its price from its 52-week high of $123.37. Fellow contributor BayesianLearner published yesterday an interesting article where he claims that Gilead's earnings will not matter. The author, which is a disappointed investor in Gilead's stock, said that he has little hopes for his shares to recover; "No matter how much cash flow Gilead generates, the story will only change with a completely new product line." I must admit that I am holding Gilead's stock for quite a time, and naturally I do not like to see my shares losing almost 33% of their June 2015 peak value. However, I believe that Gilead's earnings will matter. Showing superb results, and revealing some of the company's programs in the conference call, could give the stock a significant boost.

In my opinion, the fact that Merck (NYSE:MRK) gained last week FDA approval for its Zepatier drug for the treatment of hepatitis C virus, should not have had a significant impact on Gilead's stock, since it has been anticipated for a long time. What's more, according to Merck, though HCV treatments are now available, there is still a significant unmet medical need. It is estimated that less than one in five patients with chronic HCV infection are currently treated with thousands of new cases being diagnosed each year. Also, a majority of patients with chronic HCV have not yet been treated in some cases due to cost constraints. Also, the price that Merck has set, $54,600 for a 12-week regimen, is in the range of net prices of other commonly used HCV direct-acting antiviral regimens at 12 weeks of therapy. As such, a significant decline in HCV drugs is not expected.

Valuation

Considering its compelling valuation metrics and its high earnings growth prospects GILD's stock, in my opinion, is extremely undervalued. Gilead's trailing P/E is very low at 7.60, and its forward P/E is even lower at 6.87. The Enterprise Value/EBITDA ratio is also very low at 5.77, the second lowest among all 56 S&P 500 healthcare stocks, and the PEG ratio is extremely low at 0.52. Also, the price-to-free-cash-flow ratio is very low at 7.58, the second lowest among all S&P 500 healthcare stocks.

The 10 S&P 500 healthcare stocks with the lowest EV/EBITDA ratio

The 10 S&P 500 healthcare stocks with the lowest price-to-free-cash-flow ratio

Source: Portfolio123

During its third quarter of 2015, Gilead generated $4.1 billion in operating cash flow, utilized $3.1 billion to repurchase 28 million shares and paid a cash dividend of $627 million, or $0.43 per share. Gilead started to pay dividend in the second quarter of 2015. The forward annual dividend yield is at 2.07%, and the payout ratio is only 7.5%.

Summary

Gilead is scheduled to report its fourth-quarter 2015 financial results on Tuesday, February 02, after market close. According to 19 analysts' average estimate, Gilead is expected to post a profit of $2.99 a share, a 23% rise from its actual earnings for the same quarter a year ago. There was one up revision during the last seven days and five EPS up revisions during the last thirty days. Since Gilead has shown significant earnings per share surprise in seven of its last eight quarters, there is a good chance that the company will beat estimates also in the fourth quarter. In my opinion, the fact that Merck gained last week FDA approval for its Zepatier drug for the treatment of hepatitis C virus, should not have had a significant impact on Gilead's stock, since it has been anticipated for a long time. Considering its compelling valuation metrics and its high earnings growth prospects GILD's stock is extremely undervalued. The EV/EBITDA ratio is very low at 5.77, the second lowest among all 56 S&P 500 healthcare stocks, and the price-to-free-cash-flow ratio is also very low at 7.58, the second lowest among all S&P 500 healthcare stocks. Moreover, the company returns substantial capital to its shareholders by stock buyback and dividend payments. In my view, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price, the average target price of the top analysts is at $120.20, up 44.8% from the January 29 closing price, which appears reasonable.

Disclosure: I am/we are long GILD.

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.