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Gilead Sciences, Inc. (GILD)

Health Care
Biotechnology

Rating:
Rating Since: 03/14/2014
Prior Rating:
HOLD
Grade

74.6

Top-Down

SectorNEUTRAL
IndustryPOSITIVE
SentimentNEGATIVE
FundamentalBUY
08/30/2016

$77.92

Dividend Yield
2.26%
52 Wk High
$111.61
Market Cap
102,828.00
52 Wk Low
$77.92
Short Interest
Next Report
10/25/2016

Market Growth LT A+
Market Growth ST D
EPS Growth A+
Growth Potential D
Earnings Impact C
Earnings Surprise B+

Mixed Growth Record Based on Company's Recent Reports Suggest Investors Use Caution in Buying the Stock
Gilead Sciences,'s recently reported $7.79 billion in revenue booked during the last quarter marks a sharp reversal from an excellent long term growth trend. This latest report represents a 3.36% decline from the $8.06 billion in revenue reported by the company during the same quarter a year ago. By comparison, it booked $32.16 billion in revenue in the 12 months ended also last quarter, 213.87% higher than what it did in total sales during the equivalent period three years earlier, or $10.25 billion. Such a drastic reversal belies a severe downturn in the company's business likely to have a significant impact on profitability as well. It also reported a yearly drop in profit during the last quarter from the year earlier period, a sudden reversal from the strong profit growth the company has been posting on a long term basis. MarketGrader measures long term profit growth by comparing the latest full year profit (12-month trailing) to the equivalent period's results three years earlier. Gilead Sciences,'s Second quarter net fell 22.15% to $3.50 billion from the year earlier profit of $4.49 billion (excluding extraordinary items) , which contrasts with its growth in 12-month trailing profit over a three year period. Also including last quarter's results, the company's profit grew to $16.35 billion for the 12 months ended June 30, 2016, a 457.34% jump from full year profit of $2.93 billion reported for the period ended three years earlier. A modest expansion in margins reported by the company in the latest quarter, with average growth in EBITDA, operating and net margins of 0.42%, represents a slowdown from its margin growth of the two previous quarters.
     The company reported earnings on July 26, 2016 that were 1.99% higher than the analysts' consensus estimate; however, the stock fell 7.63% following the announcement. Even though this report disappointed investors, it extended a trend of positive earnings surprises, as it has surpassed analysts' estimates by an average of 10.79% in the last six reports.

 

Capital Structure D
P/E Analysis A+
Price/Book Ratio D
Price/Cash Flow Ratio A+
Price/Sales Ratio A+
Market Value A+

Company's Shares Are Attractively Priced Considering the Strength of its Overall Fundamentals
Trading currently at 6.81 times 12-month earnings per share, Gilead Sciences,'s stock is priced inexpensively relative to its EPS growth rate in the last five years. Our indicator looks at the 12-month period ended in each quarter within the last five years and calculates the company's annualized growth rate, which is then used to compute the stock's "optimum" P/E. Based on this analysis, Gilead Sciences,'s earnings per share have grown strongly at an annualized rate of 46.89%. which translates into an optimum P/E ratio of 47.38, 85.63% higher than where the stock trades now. Assuming this growth rate is sustained in coming quarters, the company's margins may continue to expand if it maintains its current Profitability overall grade. This would bode well for the stock in the future. The stock also trades at 6.81 times forward earnings estimates for the next four quarters, lower than its trailing P/E and the S&P 500 index's forward P/E of 15.20. By placing a lower multiple on the company's future earnings than it does on the market as a whole, investors may see the company as financially strong but with relatively poor growth prospects. This may offer a valuable opportunity for patient investors willing to wait for future earnings reports.
     Gilead Sciences,'s price to book ratio varies significantly depending whether intangible assets (which make up an astounding 89.49% of total stockholders' equity) are included into total assets. If they are, the stock's price to book ratio is a moderate 6.80, while removing intangible assets such as goodwill results in a much richer price to book ratio of 64.66, attaching very high expectations to the company's future earnings power. Based on the $13.15 in cash flow per share generated by the company in the last twelve months, at the current price of $77.92 the stock trades at 5.92 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its price to sales ratio of 3.22, based on trailing 12-month sales, is 92.09% lower than the Biotechnology's average ratio of 40.76, a very large discount to its peers. Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. By this measure Gilead Sciences, is priced very attractively with a total value of $102.83 billion , only 5.89 times higher than its latest quarterly net income plus depreciation.

 

Asset Utilization A+
Capital Utilization A+
Operating Margins A+
Relative Margins A+
Return on Equity A+
Quality of Revenues A+

Company's Profitability Is Remarkable, Reflective of Excellent Operating Conditions and Strong Management
Gilead Sciences, is a very profitable company with strong overall indicators in this section of our analysis. The company's different measures of return to shareholders and margins are typically above those of its peers. In the last four quarters Gilead Sciences, earned a profit of $16.35 billion, equivalent to 50.83% of its sales in the period. Operating income during that same period accounted for 64.98% of sales, 686.60% higher than the average operating margin for the Biotechnology industry, which was 8.18%. Gilead Sciences,'s return on equity, based on trailing 12-month earnings, is not only outstanding at 105.21%, but it's higher than the 92.36% return on equity from the year earlier period. This is an important metric of management efficiency in our grading system, as it measures the amount earned on an investment in the company's common stock.
     The company is adequately leveraged based on these results, with total debt 1.42 times larger than total equity. Its long term debt, which based on its latest report represents 57.97% of total capital, poses no apparent short term risks. Gilead Sciences,'s core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $22.71 billion, or 14.24% above the $19.88 billion earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.

 

Cash Flow Growth D
EBIDTA Margin A+
Debt/Cash Flow Ratio A+
Interest Cov. Capacity A+
Economic Value A+
Retention Rate A+

Company's Cash Flow Is Very Well Managed as Our Analysis Reflects a Very Healthy Operation
Gilead Sciences,'s cash flow declined significantly last quarter to $4.94 billion, 12.69% lower than the year earlier quarterly cash flow of $5.66 billion. This marks an accelerating decline from twelve month trailing cash flow, which fell to $17.82 billion in the period ended last quarter, 3.26% lower than the $18.42 billion in the year earlier period, underscoring the ongoing deterioration of the company's business. At the end of last quarter the company's net debt to EBITDA ratio was 2.47, significantly higher than the year earlier ratio of 0.61. Despite such a large increase the latest number is very low and doesn't imply there are any issues with the company's leverage or its ability to finance it with the cash flow generated by its operations. Gilead Sciences, net debt, defined as total debt minus cash on hand, was $13.38 billion last quarter and EBITDA was $5.41 billion. Also in the last twelve months, Gilead Sciences,'s total debt grew from 42.99% of total capital to 58.75%, a 36.66% increase and not a favorable trend considering its poor liquidity. Oddly--and at least a positive development--the company now has 1.64% more cash on hand than it did a year ago.
     MarketGrader measures every company's economic value added (EVA) to determine its ability to generate a true economic profit after covering not only its operating costs but also its cost of capital. It is essentially the return left over to shareholders after deducting the company's cost of equity and cost of debt from total return on investment. In Gilead Sciences,'s case, the business generated a 56.53% return on investment during the last four quarters, based on operating income for the period. The company had $36.96 billion in total invested capital in its most recently reported quarter, which included all common and preferred equity plus all long term debt. After breaking down invested capital into equity and debt, we conclude that Gilead Sciences,'s weighted cost of equity of 3.63% is only slightly larger than its cost of debt of 1.87%. The combination of both, or 5.50% in total cost of capital is small when compared to the total return on investment, leaving a total of 51.04% in economic value added, a remarkable return to the company's shareholders after covering both operating and capital costs. The company hiked its quarterly common dividend in its latest quarter, reported on December 31, 2015, to 47.00 cents a share from 43.00 cents, a 9.30% increase. It has now been paying dividends for at least 1 years and the stock's current yield is 2.26%. Gilead Sciences, paid out $2.45 billion in common dividends during the 12 months ended last quarter, accounting for 13.77% of cash flow and 15.01% of total earnings after taxes. This relatively modest payout is slightly higher than the 14.19% of total earnings is paid out in the 12 months ended a quarter earlier. Assuming it maintains its generally positive fundamentals, the company has ample flexibility to increase its payout by a bigger margin in the future should it wish to do so.

 

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