Gilead, Gilead Where Art Thou Gilead?

| About: Gilead Sciences, (GILD)

Summary

Relative to its 5-Year average trailing PE Gilead is trading at a 62% discount.

Relative to its 5-Year average forward PE Gilead is trading at a 48% discount and 63% to the S&P 500.

Price reductions are just noise as politicians are huffing and puffing to get reelected.

Gilead oh Gilead where art thou Gilead? Gilead Science GILD the once darling of my portfolio and largest holding has disappeared for 2015 and has started off 2016 with a rocky start. The way I picture Gilead as that outstanding touted standout freshmen quarterback who was gun slinging touchdowns left and right his first year and then has practically fallen off the map his sophomore and junior years. Is Gilead just another bust who crumbled under the pressure and expectations? Can it Gilead be revived and return to its gun slinging ways? For me the answer is yes and no, kind of in the gray. Will Gilead return to the explosive growth that we once saw, the answer is no but that does not mean they cannot still have flashes of greatness that makes it an attractive buy for a long-term investor who is looking for stability and a cash generating machine.

Valuations based on Multiples

The most convincing reason why I am still bullish on Gilead Science is simply based on valuation based on multiples. I do not believe there is another similar company with Gilead's market capitalization that is trading at such low valuations.

The first multiple I want to look at is Gilead's Price to Sales. Currently Gilead's price to sales is around 3.8. Historically on a 5-Year average, Gilead has traded around 6.4. Both of these are well below the Biotech & Medical Research Industry average of 12.4.

Next I want to look at the trailing PE. Obviously it's the price divided by the last four quarterly earnings. So it is backward looking but I believe it helps gives some perspective of how investors have valued Gilead in the past. The current trailing PE is 7.8. Gilead's 5-Year average is 20.4 . Biotech & Medical Research Industry have an average of 28.4. Even the S&P 500 have an average 25.7, over 3X of Gilead's. Relative to its 5-Year average Gilead is trading at a 62% discount. Just for comparison Merck (NYSE:MRK) trades around 33.9 and Celgene (NASDAQ:CELG) around 51.1

The counterpart to trailing is the forward looking PE. Gilead's forward PE is even lower at 7.6 vs. its 5-year average of 14.5. The Biotech Industry average is 26.9. Relative to its 5-Year average Gilead is trading at a 48% discount and 63% discount to the S&P which is unheard of for a Biotech company. For comparison Merck trades around 14.3 and Celgene around 17.4.

The most comforting multiple in my view is the forward PEG, which is the forward PE divided by the five year forecasted growth rate. It is without a doubt that Gilead's topline growth will slow if not decline in the coming years. This lack of forecasted revenue growth has wreaked havoc to the share price and investors alike. At Gilead's current price, it has a forward PEG ratio of 1.5, which about double its 5-Year average. Yes, I know you are wondering how is this comforting? The reason I find it comforting is that the industry average is 1.6. To me, this shows that Gilead's slow growth is already baked into the stock price and it is being evaluated close to its peers. Therefore, I see Gilead is near the bottom and has established a price floor. For comparison Merck trades around 3 and Celgene around .8.

Fundamental Indicators

Gilead Science has outstanding gross margins of around 87.5% for the trailing four quarters and a net margin 55.1%. Major concerns are legislation and regulation on drug prices. Yes, it is a concern of mind but I do not believe anything substantial will come out of it. Most of the current noise is just politicians huffing and puffing to get reelected. Once in office they most likely they will do nothing, like usual. Most drug makers already discount their products to lower prices, however the media likes to show just the sticker price. Also, I believe Gilead and many other companies can justify their price of their drugs just simply based on the amount of money they save the federal government and insurance companies, this is not even including the better quality of life for patients.

Balance Sheet Health

Gilead Science has a war chest of cash, plenty to offer in an all cash deal for drug pipeline acquisitions. Their current ratio is 2.5, debt-capital ratio of 52.6%. Yes, they carry debt but nothing their cash generating machine cannot handle. Interest funding is only 3.4% and interest Coverage is 24.6.

Conclusion

The 21 analysts offering 12-month price forecasts for Gilead Sciences have a median target of 115.00, with a high estimate of 135.00 and a low estimate of 87.00. The median estimate represents a +25.18% increase from the last price of 91.87. I myself range on the higher end of the of the estimates. I am estimating around $12.00 EPS for 2016 based on a 11X multiple to $132 dollars. Regardless of where Gilead ends in 2016 I think the long-term prospects are solid. Gilead is maturing from the freshmen stud to a mature biotech stock who will continue to produce cash and reward shareholders through dividend growth and share repurchases.

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.