Gilead Sciences Vs. Its Peers

| About: Gilead Sciences, (GILD)


Extremely low PE ratio but moderate growth outlook. .

Amazing margins and returns.

About to outperform peers in a risky market .

Normally when I look at companies that have a market cap over 100 billion USD they are either growth stocks with sky-high PEs or 'boring', high dividend paying companies that have been around for decades.

Gilead Sciences GILD was founded by Michael Riordan in California almost 29 years ago. Today the company is worth almost 125 billion USD and employs over 8000 people who do research in areas of unmet medial needs.

In comparison to other biotechnology companies we see that Gilead is not only one of the biggest players but has a big portfolio of drugs that are already available.

In general we can say that most biotech companies are expected to do well in the future. Most of them have almost no finished products and therefore no profit. I'm not saying that there is anything wrong with it but it is interesting to look at a company that has matured.

Gilead is trading at just 7.7 times earnings and pays a 1.9% dividend. The future growth expectations look like this:

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Source: NASDAQ

Future growth is 'just' 4.2% for the next five years. However, the PEG ratio is as low as 1.8. Regarding future growth, I don't think the main reason to buy this stock is future growth but it is not a bad sign either.

The most interesting point are margins and efficiency in general. Gilead is by far the most efficient company with margins as high as 56% (profit) and almost 90% for its gross result.

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Gilead has no problems servicing short term liabilities since both its current and quick ratio are above 2. The only thing that looks negative is long term debt. Gilead's long term debt is comparable to Amgen's AMGN debt position but way lower than AbbVie ABBV and Celgene CELG. Note that I didn't give ABBV and CELG a color for their debt in the table. Their debt is so high that it would mess up my layout.

Gilead's cost of debt is currently between 3-4% signaling no distress whatsoever.

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A further signal for Gilead's maturity is its decreasing R&D spending as a percentage of sales. Upcoming and promising biotech companies spend about 40-50% of sales revenue of R&D.

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Source: BN Capital, SEC

As I mentioned, Gilead is a strong biotech. The company is extremely profitable, has moderate growth and a low PE. Gilead is the perfect stock if you want to own biotech without too much risk. The following graph shows the ratio spread between Gilead and the SPDR S&P Biotech ETF XBI. XBI has a lot of smaller companies as top holdings. The iShares Nasdaq Biotech ETF IBB however has bigger companies like CELG, AMGN etc. as top holdings.

Source: Yahoo Finance -XBI top holdings-

The graph below shows the GILD/XBI ratio spread (black line), GILD green line) and XBI (blue line).

Click to enlargeSource: Tradingview

Markets got into some trouble after QE ended and growth started slowing which puts a tremendous pressure on high risk assets like high yield bonds and biotech. I wrote a few articles pointing out why the market is about to go lower and advise to buy GILD only if you hedge the stock. I am trading the hedge GILD/XBI as seen above and will close it if RISK-ON for the long term returns.

RISK-ON means that investors are willing to take more risk. There are many risk indicators that can be used. The main idea behind these indicators is to compare less risky assets with risky assets. For example transportation stocks and utility stocks.

In the case of GILD and XBI we see a similar pattern. GILD is outperforming XBI in times of risk aversion and underperforming if traders are willing to take risk. This is not a surprise since GILD is a matured biotech stock and a much safer than a biotech that hasn't developed any drugs yet.

On the other hand, if I want to take more risk I am a buyer of XBIand would ignore GILD. However, for now, I expect GILD to outperform XBI on the mid term.

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.

Additional disclosure: The long position GILD has been hedged with XBI shorts.