Will Gilead Sciences Surprise Again?

| About: Gilead Sciences, (GILD)

Summary

As I see it, the acquisition of Nimbus’ ACC-inhibitor program, although not a major acquisition, it is a very positive move by Gilead.

What's more, this acquisition fits well with Gilead policy of looking at some of the things that could be combined with its inhibitors.

Considering its compelling valuation metrics GILD's stock, in my opinion, is undervalued; the trailing P/E is very low at 7.78, and the EV/EBITDA ratio is also very low at 6.04.

The average target price of the top analysts is at $110.60, up 15.7% from the April 7 closing price, which appears reasonable, in my opinion.

Gilead Sciences (NASDAQ:GILD) is scheduled to report its first-quarter 2016 financial results on Thursday, April 28, after market close. According to 23 analysts' average estimate, Gilead is expected to post a profit of $3.10 a share, a 5.4% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $3.44 a share while the lowest is for a profit of $2.71 a share. Revenue for the first quarter is expected to increase 5.3% year-over-year to $8.0 billion, according to 20 analysts' average estimate. There was one up revision during the last seven days and two EPS up revisions during the last thirty days. Since Gilead has shown significant earnings per share surprise in eight of its last nine quarters, as shown in the table below, there is a good chance that the company will beat estimates also in the first quarter.

Data: Yahoo Finance

Since the beginning of the year, GILD's stock is down 5.6% while the S&P 500 Index has decreased 0.1%, and the NASDAQ Composite Index has lost 3.2%. However, since the beginning of 2012, GILD' has gained an astounding 375%. In this period, the S&P 500 Index has increased 62.4%, and the Nasdaq Composite Index has risen 86.1%. According to TipRanks, the average target price of the top analysts is at $110.60, up 15.7% from the April 7 closing price, which appears reasonable, in my opinion.

GILD Daily Chart

Click to enlarge

GILD Weekly Chart

Click to enlarge

Charts: TradeStation Group, Inc.

On April 04, Gilead Sciences and Nimbus Therapeutics, LLC announced that the companies have signed a definitive agreement under which Gilead will acquire Nimbus Apollo, Inc., a wholly-owned subsidiary of Nimbus Therapeutics, and its Acetyl-CoA Carboxylase [ACC] inhibitor program. Nimbus Therapeutics will receive an upfront payment of $400 million, with the potential to receive an additional $800 million in development-related milestones over time. The Nimbus Apollo program includes the lead candidate NDI-010976, an ACC inhibitor, and other preclinical ACC inhibitors for the treatment of non-alcoholic steatohepatitis ([NASH], and for the potential treatment of hepatocellular carcinoma [HCC] and other diseases. NDI-010976 was granted Fast Track designation by the U.S. Food and Drug Administration in February 2016 and Phase 1 data for the compound will be presented next month. NASH is a serious liver disease resulting from metabolic dysfunction associated with steatosis (fat within the liver) that can lead to inflammation, hepatocellular injury, progressive fibrosis and cirrhosis. Affecting up to 15 million people in the United States, NASH is expected to become the leading indication for liver transplantation by 2020. ACC inhibitors target a central cause of the disease - reducing aberrant lipid-derived signaling that can result in steatosis, inflammation and fibrosis.

According to Gilead, the acquisition of Nimbus' ACC-inhibitor program represents a timely and important opportunity to accelerate Gilead's ongoing efforts to address unmet needs in NASH. These molecules will complement and further strengthen Gilead's pipeline and capabilities to advance a broad clinical program in NASH that includes compounds targeting multiple key pathways involved in the pathogenesis of the disease.

Although Gilead has been very successful in the last few years, and its revenues and earnings have soared, its shares have lost 22.5% from its record price of $123.37 on June 24, 2015. It seems that investors are concerned about the growth prospects of the company since sales of HCV drugs have flattened. Many investors have claimed that only by significant acquisitions the company could resume growth. As I see it, the acquisition of Nimbus' ACC-inhibitor program, although not a major acquisition, it is a very positive move by Gilead. What's more, this acquisition fits well with Gilead policy of looking at some of the things that could be combined with its inhibitors. Gilead has the resources to make significant acquisitions; it has a very strong balance sheet. As of December 31, 2015, Gilead had $26.2 billion in cash and cash equivalents and $22.83 billion in total debt. Moreover, the company is generating strong cash flow. During 2015, Gilead generated $20.3 billion in operating cash flow, utilized $10.0 billion to repurchase 95 million shares of its stock and paid cash dividends of $1.9 billion, or $1.29 per share.

Valuation

Considering its compelling valuation metrics GILD's stock, in my opinion, is undervalued. Gilead's trailing P/E is very low at 7.78, and its forward P/E is even lower at 7.69. The Enterprise Value/EBITDA ratio is also very low at 6.04, and the price-to-free-cash-flow ratio is extremely low at 7.47.

Gilead started to pay dividend in the second quarter of 2015. The forward annual dividend yield is at 1.80%, and the payout ratio is only 10.4%.

Ranking

According to Portfolio123's "All-Stars: Greenblatt" ranking system, GILD's stock is ranked second among all S&P 500 stocks.

Click to enlarge

The "All-Stars: Greenblatt" ranking system is taking into account just two factors; Return on Capital and Earnings Yield (E/P) in equal proportions. Back-testing has proved that this ranking system is one of the best free available ranking method. I recommend investors to read Joel Greenblatt's book "The Little Book That Beats the Market", where he thoroughly explains his system.

Summary

Gilead is scheduled to report its first-quarter 2016 financial results on Thursday, April 28, after market close. According to 23 analysts' average estimate, Gilead is expected to post a profit of $3.10 a share, a 5.4% rise from its actual earnings for the same quarter a year ago. There was one up revision during the last seven days and two EPS up revisions during the past 30 days. Since Gilead has shown significant earnings per share surprise in eight of its last nine quarters, there is a good chance that the company will beat estimates also in the first quarter. As I see it, the acquisition of Nimbus' ACC-inhibitor program, although not a major acquisition, it is a very positive move by Gilead. What's more, this acquisition fits well with Gilead policy of looking at some of the things that could be combined with its inhibitors. Considering its compelling valuation metrics GILD's stock, in my opinion, is undervalued; the trailing P/E is very low at 7.78, and the EV/EBITDA ratio is also very low at 6.04. Moreover, the company returns substantial capital to its shareholders by stock buyback and dividend payments. The average target price of the top analysts is at $110.60, up 15.7% from the April 7 closing price, which appears reasonable, in my opinion.

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.