Gilead: Q2 Earnings Crucial

| About: Gilead Sciences, (GILD)

Summary

I still see this stock as a value play. Its earnings multiple, fundamentals and track record all look very attractive.

HCV is the area where Gilead is struggling. Can the company bounce back and convince the market in the process?

Glaxo's offerings are providing stiff opposition in the HIV space but you would have to back Gilead's R&D firepower to adapt.

Gilead (NASDAQ:GILD) announces its second quarter earnings on the 25th of this month. This stock is getting a lot of attention at present for a variety of reasons.

  • Firstly it has a market cap of over $116 billion and although its share price has dropped by over $30 a share over the past 12 months, the company seems to still on track to take in around $30 to $31 billion in sales this year. It raked in $32.6 billion last year with the share price almost topping $120 so with a sub $88 share price at present, we might have a value play possibility on our hands.
  • Biotech results so far this earnings season have been good. Gilead is cheap at present as its earnings multiple is 7.4 which is much lower than the Industry's average of 39.3. Therefore one would think that Gilead's valuation has to increase if valuations in general increase in this sector.
  • Although the company is facing increasing competition in the HCV and HIV divisions, one can't dispute that Gilead's innovation down through the years through its sustained elevated R&D spend has always kept this company at the forefront. This is where we are at present with relation to this stock. Is it a value play or value trap?. This will be the focus of this article as the company is about to announce its second quarter earnings in a matter of days.

When evaluating a potential value play, the first metrics to look at are undoubtedly cash, debt and income to see how Gilead shapes up in these areas. Firstly the company finished last quarter with $8.32 billion on its balance sheet and just over $21 billion in long term debt. Equity on the balance sheet is just over $14 billion which gives us a debt to equity ratio of 1.57. On the earnings side, the company pulled in $3.57 billion last quarter and analysts have its revenue expectation for the year pinned at just over $31 billion. These all look very attractive. In fact many of Gilead's fundamentals are still trending strongly upwards as shown by the chart below..

Earnings Per Share $11.68 - Pass
Free Cash Flow $17,741 billion (10-Year Trend Is Up) - Pass
Revenues $32.83 billion (10-Year Trend Is Up) - Pass
Operating Profit Margins 65.4% - (10-Year Trend Is Up) - Pass
Price History of the stock Up 471% in the last 10 years excluding dividends - Pass
Healthy balance sheet Total assets = $47.7 billion (10-Year Trend Is Up) - Pass
Competitive Advantage
  • Patent Protection
  • Strong Oral Hepatitis Position
  • Strong Future Pipeline
Resistant to recessions? Sales and revenues rose during the recession of 2008 - Pass
Click to enlarge

Therefore "value investors" are eyeing up this company as a value play due to its earnings multiple dropping to the 7.5 level. Furthermore its price to cash flow ratio of only 7 (value plays for me are 10 and under) looks very attractive when investing for ongoing shareholder returns through dividends and buybacks. However the stock has dropped because both 2016 and 2017 top and bottom lines (and maybe 2018) are expected to be lower than 2015 numbers. The question is whether the drop in sales and profits are priced into the stock or not. Furthermore will the drop be temporary or will 2015 be the year that Gilead earnings top out? These are the questions a value investor has to ask himself before pulling the trigger on a potential stock. The fundamentals and balance sheet are one thing but how is the industry progressing? How about competition?

As we head into earnings, Gilead's track record is not good with respect to how its share price reacts in the aftermath. In fact, Gilead's share price could fall off a cliff once again if it doesn't hit its numbers (this has been the pattern up to now - share price vastly underperforming beats and collapsing when misses are reported). There is obviously something that is keeping this stock in check at present which value investors should be aware of.

As Gilead derives most of its profits from its HCV division, this is the area the market will be zoning in on once again to see if there is any uplift. The first quarter took a hit of 6% in HCV compounded by sizable drops in European and US top lines. Harvoni sales dropped by 16% last quarter due to heightened competition which lowered price across the board. Bullish analysts are stating that the excellent first quarter in 2015 was to blame for the "seemingly" poor showing last quarter (rolling quarter comparison). In Q1-2015, warehoused patients spiked demand for the drug which didn't take place last quarter. Therefore value investors will be looking for stability in this area of the business. It's the company's main bread winner and the market will need to see optimism for it to price the stock higher..

On The HIV side, freshly approved combi pills and recent approval in Europe will undoubtedly be a help to this division. Gilead presently faces tough competition from Glaxo's "Tivicay" which is boasting less harmful side effects and whose simpler two drug treatment could become the foundation for the industry going forward. Gilead is quickly playing catch-up by doing its own trials on integrator inhibitors plus raising its prices on older drugs (which will come off patent starting from 2018) in an effort to switch customers onto its newly approved cheaper alternatives. Here value investors need to watch market share. Glaxo's (NYSE:GSK) offerings have been approved since 2013 which means they were first to market with this simpler solution. Gilead's offering "Truvada" means more side effects and more pills at present. Patients are not likely to change mid-therapy (if side effects) but patients looking for a solution may chose Glaxo at present.

However Gilead's fundamentals have to count for something which is why I would still say that there is a 80 to 90% probability that this stock will come roaring back. Its R&D budget is second to none which is why you have to back the expertise that it has gained over the last decade. It will most probably adapt once more which is why you may never again see it at this valuation. Wait until you see the green shoots and then buy the stock with an earnings multiple of 12? Or buy it now and trust its past record?

For the moment we will hold and see how earnings play out. However this one is most certainly one to watch closely in the weeks ahead. To sum up, I'm going to be adding a few good dividend and growth stocks to the Elevation Portfolio over the next several weeks when I see value. In order to ensure that income is brought in every month, it's imperative that they are not correlated and all don't have similar valuations. You can follow along by pressing the "Follow" button above.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.