Gilead Sciences: Negatives Overdone

| About: Gilead Sciences, (GILD)

Summary

Gilead Sciences continues trading towards the multi-year lows.

The drug pipeline isn't as empty as suggested by the general market analysis.

The strong net payout yields trump all of the concerns.

Gilead Sciences (NASDAQ:GILD) trades down near the recent lows following another weak quarter. The biotech has sales issues, but the company is ramping up spending in drug development that crimped earnings.

At $75, Gilead Sciences is down an incredible $45 from the highs only a year ago. This signal continues to suggest the weakness is overdone.

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No Pipeline?

The market suggests that Gilead Sciences has no pipeline and partially justifies the weak stock for this reason. The biotech is spending aggressively on R&D with a substantial 38% increase to $981 million. The amount includes a $200 million milestone payment to Nimbus.

In total, Gilead Sciences has a massive drug pipeline. The slide presentation lists 31 different drug candidates at least in a Phase 1 trial. The promising part is the shift to NASH, oncology and inflammation categories with several Phase 3 trials in these sectors.

Most analysts think the large biotech needs to make a big acquisition. Ben Levisohn lists the prime target as Incyte (NASDAQ:INCY) or possibly the smaller Tesaro (NASDAQ:TSRO).

With $31.6 billion in cash, Gilead Sciences could easily complete a deal for a stock like Tesaro that could warrant a $10 billion price tag. Incyte gets more tricky already trading for over $20 billion.

Analysts forecast Incyte ramping sales to $1.5 billion next year for a 39% growth rate. As well, earnings are expected to ramp to $1.42 per share. Can Gilead Sciences really pay $25 billion or more for the stock and a stock price of nearly 100x forward EPS estimates?

Incyte has to achieve substantial earnings gains in 2018 and beyond to justify such a large valuation.

Substantial Yields

While one can obsess over the pipeline or the acquisition targets that appear aggressive, the signals from management appear more bullish on the prospects of the stock. The combination of the strong balance sheet and the dip in the market valuation provides a positive set up.

Remember that Gilead Sciences has aggressively spent on stock buybacks when the stock traded over $90. Now at $75, do you really want to bet against the company with a large cash hoard and strong cash flows.

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During Q3, the biotech spent another $1 billion on stock buybacks. Nothing impressive alone, but once factoring in the 2.5% dividend yield and the $5 billion accelerated stock buyback during Q1, the move appears very impressive.

The net payout yield that combines the dividend yield and net stock buyback yield sits at a rather impressive 15%.

GILD Net Common Payout Yield (<a href=

GILD Net Common Payout Yield (TTM) data by YCharts

The yield is one of the largest in the large cap sector. Yields this high have historically generated market beating returns.

Takeaway

The key investor takeaway is that the negatives appear priced into the stock. The market gives the large biotech no credit for a sizable pipeline whether it includes any near-term blockbuster drugs.

The management team signals the future is bright and this signal while imperfect typically trumps the sentiment of the market.

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 information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.