Revenue grew by 1%.
Earnings declined by 16%.
Free cash flow fell by 13%.
I am a value investor. I am not a licensed or registered investment professional. I currently own NO shares of the company mentioned in this post. Financial statement data was obtained from the company’s most recent SEC 10-K filing.
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.
What They Do
Gilead Sciences is a research-based biopharmaceutical company whose primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus (HBV) infection, oncology and inflammation, and serious cardiovascular and respiratory conditions. Industry peers include GlaxoSmithKline plc, Pfizer, and Roche Holding AG.
Recent Acquisitions and Divestitures
There were no substantive acquisitions or divestiture during fiscal 2019.
There were no cross fiscal year subsequent events.
My current short-term target for the stock is $73.12, with an initial trailing stop set at $72.16. Based on a recent price of $73.26, upward price movement will find resistance at $75.50, and again at $78.31, with final resistance found at $80.22. Downward price movement will find support at $69.86 and again at $68.69, with final support found at $66.95.
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 0.74 and my volatility value is $90.
Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Considering the company’s earnings, $2072 million ($1.64 per share) of net income after taxes, came from from sources unrelated to day to day operations and/or income tax benefits.
My momentum target for the stock is $111. Momentum targets are determined by integrating a company’s most recent annual EPS and year-over-year earnings growth, with the current yield of a 10-year treasury. Momentum investing often requires investors to trade in stocks that have already enjoyed significant gains while making no allowances for overall market corrections or the sustainability of a company’s earnings.
My current growth target for the stock is $72. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.
Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 106 shares of stock with a cost basis of $94.26 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $64.93 per share. During that holding period you would have collected $211 in regular and special dividends, and your initial $10K investment would have returned to you $6,888 a loss of 31% excluding regular and special dividends.
Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 3.67%.
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.
Over the past 12 months, the company has recorded 95 insider trades involving 592,023 shares of stock. Of those 95 insider trades, 50 were Buys involving 351,290 shares of stock, and 45 were Sells involving 240,733 shares of stock, creating an insider buy to sell ratio of 1.5 to 1.
Prior Average Valuations
My average valuation for the prior five year period of FY 2015 through FY 2019 was $67. The stock price during that time period averaged $80, earnings averaged $7.45 per share, and the average PE Ratio was 11. The current PE Ratio is 26.
Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $73 and my equity value (market cap plus cash less debt) is $73, making my E2E Ratio, 0.99.
Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $54. My worksheet target prices are derivatives of my fair value estimate.
Gilead Sciences, Inc. (Nasdaq: GILD) – FYE 12/2019 – SELL HALF – The stock is currently trading at levels at or above my most recent $67 reduce target, but below my most recent $86 terminate target. Please See Linked PDF Worksheet
There you are, short and, hopefully, to the point.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.