Gilead Sciences: Surging Yield Signals Weakness Overdone

| About: Gilead Sciences, (GILD)

Summary

Gilead Sciences hit new multi-year lows.

Analyst price target cuts pressure stock to unreasonable lows.

Investors should pay more attention to the surging net payout yield that typically works as a better signal than emotion.

Gilead Sciences (NASDAQ:GILD) continues dipping to new multi-year lows. The biotech faces some pressure regarding the ability to maintain profit levels and reduced full-year estimates with the Q2 results.

At $72.75, the stock trades at valuation levels not typically seen in the biotech sector. One typical signal of a compelling entry point is when even an analyst with multiple price cuts isn't even bearish. Another signal though provides an even more compelling reason to buy the stock.

Momentum Impacted By Analysts

About 20 months ago, Credit Suisse downgraded Gilead Sciences to Neutral with a $115 price target, down from $130. At the time, the analyst forecast the biotech earning only $8.31 per share for 2016. The firm reckoned that the biotech would struggle with HCV franchise revenues.

Now, as the year comes towards an end, the average analyst forecasts Gilead Sciences earning roughly $11.77 for 2016. The numbers are down from the peak, but still very high for a stock trading at only 6x forward estimates.

GILD EPS Estimates for Current Fiscal Year Chart

GILD EPS Estimates for Current Fiscal Year data by YCharts

Recently, Credit Suisse reiterated an Outperform rating, but the price target is now $95. Interestingly, the firm now sees a floor in the shares around $60-$70 per share despite the $95 target. The forecast is for HCV revenues falling to $9 billion in 2020. The firm previously had a target of $10.2 billion in 2018.

The point to this story is that Credit Suisse continues to reduce the target while the revenue and EPS metrics exceed estimates. This causes negative momentum on the stock.

Massive Yields

The reason yields highly focused on stock buybacks matter is that the management team is telling a different story than the weak stock action. Prime examples are stocks like Caterpillar (NYSE:CAT) and Qualcomm (NASDAQ:QCOM) that felt similar downward pressure while the companies were buying large amounts of shares. Both stocks are up over 50% from the lows in what were seen as spiraling downward scenarios.

CAT Chart

CAT data by YCharts

Gilead Sciences faces a similar situation now. The company is highly profitable and repurchases a ton of shares sending the net payout yield (net stock buyback + dividend yield) soaring.

GILD Chart

GILD data by YCharts

The market expects Gilead Sciences to purchase a smaller biotech in the $5 to $10 billion range in order to reinvigorate growth. Such a purchase wouldn't prohibit the continuation of buybacks.

The company ended June with $24.6 billion in cash and along with debt has a small net cash position. With huge cash flows, Gilead can easily finance stock buybacks and an acquisition.

Takeaway

The key investor takeaway is that the net payout yield further points towards Gilead Sciences as an extreme bargain. As well, the constant price target cuts by analysts like Credit Suisse help to caused unintended pressure to the downside. Investors should look for momentum to shift similar to the above examples of Caterpillar and Qualcomm and use the weakness in Gilead Sciences as a buying opportunity.

Disclosure: I am/we are long GILD, CAT, QCOM.

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.