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A Value Guy looks at Gilead Sciences Inc. (GILD)

|Includes: Gilead Sciences, Inc. (GILD)

Gilead Sciences Inc
5/6/2010
 
Gilead Sciences, Inc. (Gilead) is a biopharmaceutical company that discovers, develops and commercializes therapeutics. The Company has operations in North America, Europe and Australia. The Company’s products include Truvada, Atripla, Viread, Emtriva, Hepsera, AmBisome, Letairis, Ranexa, Vistide and Cayston. The Company has sales operations, with marketing subsidiaries in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Company sells and distributes Truvada, Viread, Emtriva, Hepsera and AmBisome in Asia, Australia, Europe, Latin America, the Middle East and New Zealand, through its commercial teams, third party distributors or partners.On April 17, 2009, Gilead acquired CV Therapeutics, Inc.
 
Last Price 40.21
52 Week High 50.00
52 Week Low 38.27

Does Gilead Sciences make for an intelligent investment or intelligent speculation today?

Starting with a base estimate of annual Free Cash Flow at a value of approximately $2,850,000,000 and the number of shares outstanding at 902,000,000 shares; we used an assumed FCF annual growth of 12 percent for the first 10 years and assume zero growth from years 11 to 15.  Review the Free Cash Flow record here:

http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=GILD

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $68.82.

  Market Price = $40.21
  Intrinsic Value = $68.82  (estimated)
  Debt/Equity ratio = 0.
 
  Price To Value (P/V) ratio = .58  and the estimated bargain = 42. percent.

Before we make a purchase, we must decide ( filter #1 ) if GILD is a high quality business with good economics. Does GILD have ( filter #2 ) enduring competitive advantages, and does GILD have ( filter #3 ) honest and able management.

The current price/earnings ratio = 12.9
It 's current return on capital = -38.9
Using a debt to equity ratio of 0.
 , Gilead Sciences shows a 5-year average return on equity = 34.9

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does Gilead Sciences make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is GILD the best place to invest our money today?

TIME FORWARD PROJECTION:

How will Gilead Sciences compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of 0.
 , Gilead Sciences shows a 5-year average return on equity = 34.9 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 42. percent, and a relative FCF growth of 12 percent, then the estimated effective annual yield on this investment may be greater than 17.6 %.

Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

As always, I appreciate hearing your views,

Bud Labitan
Author of the new book 'Price To Value'
http://www.amazon.com/Price-Value-Bud-Labitan/dp/0557317185

Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'
http://www.amazon.com/dp/0615241298

Labitan Partners
budlabitan@ aol.com
www.frips.com

 



Disclosure: No positions