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|Market Growth LT||A+|
|Market Growth ST||D|
Mixed Growth Record Based on Company's Recent Reports Suggest Investors Use Caution in Buying the Stock
Gilead Sciences,'s recently reported $7.51 billion in revenue booked during the last quarter marks a sharp reversal from an excellent long term growth trend. This latest report represents a 7.96% decline from the $8.16 billion in revenue reported by the company during the same quarter a year ago. By comparison, it booked $31.51 billion in revenue in the 12 months ended also last quarter, 196.02% higher than what it did in total sales during the equivalent period three years earlier, or $10.64 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 Third quarter net fell 27.61% to $3.33 billion from the year earlier profit of $4.60 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 $15.08 billion for the 12 months ended September 30, 2016, a 394.95% jump from full year profit of $3.05 billion reported for the period ended three years earlier. The company's margins contracted during the latest quarter with an average 5.90% decline in EBITDA, operating and net margins from a year earlier, reversing the preceding quarter's margin expansion.
Following the company's earnings announcement on November 02, 2016, in which it reported Third quarter results that missed the analyst consensus estimate by 3.85%, the stock fell 3.12%, signaling that investors were already anticipating the news and are likely looking for an improvement in coming quarters. Despite this negative report, its earnings surprise record, calculated by MarketGrader as the average of the last six reports, continues to be positive; it has beaten the consensus estimate by an average of 5.70% over such period.
|Price/Cash Flow Ratio||A+|
Company's Shares Are Attractively Priced Considering the Strength of its Overall Fundamentals
Trading currently at 6.85 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 44.35%. which translates into an optimum P/E ratio of 29.21, 76.54% higher than where the stock trades now. This growth has resulted in strong financial performance, evidenced by the company's Profitability grade. For this to continue, it must reverse its recent margin slide soon. Currently the stock also has a forward P/E of 6.85, which interestingly enough is higher than its trailing P/E but lower than the S&P 500's forward P/E of 15.20. Investors therefore see more value in the company's future earnings but not as much as they see in the market in general; coupled with the company's strong fundamentals, this situation could represent an interesting but risky opportunity, meaning short term volatility with the possibility of handsome returns in the long term.
Gilead Sciences,'s price to book ratio varies significantly depending whether intangible assets (which make up an astounding 81.91% of total stockholders' equity) are included into total assets. If they are, the stock's price to book ratio is a moderate 5.68, while removing intangible assets such as goodwill results in a much richer price to book ratio of 31.40, attaching very high expectations to the company's future earnings power. Based on the $13.49 in cash flow per share generated by the company in the last twelve months, at the current price of $71.57 the stock trades at 5.31 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its price to sales ratio of 3.00, based on trailing 12-month sales, is 98.18% lower than the Biotechnology's average ratio of 164.64, a very large discount to its peers. Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. By this measure Gilead Sciences, is priced very attractively with a total value of $94.29 billion , only 5.81 times higher than its latest quarterly net income plus depreciation.
|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 $15.08 billion, equivalent to 47.85% of its sales in the period. The Biotechnology industry had an average operating margin of 8.27% in the period. The company's operating margin of 64.02% exceeded that average by 666.19%. Based on how much it has earned in the last four quarters, the return on Gilead Sciences,'s common equity has been a remarkable 89.38% during this time, even though this is below the 97.12% return on equity achieved in the year-earlier period. This metric plays an important role in how our system measures a company's management efficiency.
While this decline is obviously not a positive sign, the company's leverage, with total debt 1.60 times total equity, should not be a cause for concern as business is still very strong. Its capital structure is indeed healthy, with long term debt accounting for 60.99% of total capital. Gilead Sciences,'s core operations, as measured by the company's EBITDA, have generated $22.01 billion in earnings over the last twelve months, a modest 0.42% decline from the $22.10 billion earned in the equivalent period ended a year ago. EBITDA is used as a way of measuring core earnings since it includes money earned in its operations such as interest expense, income taxes paid and depreciation and amortization, both of which are non-cash charges.
|Cash Flow Growth||B-|
|Debt/Cash Flow Ratio||A+|
|Interest Cov. Capacity||A+|
Company's Cash Flow Is Very Well Managed as Our Analysis Reflects a Very Healthy Operation
Gilead Sciences, showed a small improvement in its quarterly cash flow during the latest period, in which it grew by 5.71% to $4.33 billion from the $4.10 billion reported in the same period last year. This is a marked improvement from the 2.27% decline in cash flow in the last twelve months versus a year before and could represent a turning point for the company's operating profitability and its future earnings growth. The company's net debt to EBITDA ratio jumped from 1.11 a year ago to 2.86 in the latest reported quarter, based on net debt (total debt minus cash on hand) of $14.80 billion and EBITDA of $5.18 billion. While the increase from the year before was pretty significant, the current ratio is still very low and suggests the company is managing its leverage appropriately and could easily pay off its debt with the cash it has on hand and what it generates from operations. During the same period Gilead Sciences,'s total debt went from accounting for 56.07% of its total capital to 61.61% in its latest quarter, while its cash on hand fell by 21.94%. Unless it begins generating a larger cash flow from operations, all this increased leverage may start hindering future growth and further erode the company's profitability.
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 46.65% return on investment during the last four quarters, based on operating income for the period. The company had $43.24 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 3.87% is only slightly larger than its cost of debt of 1.75%. The combination of both, or 5.62% in total cost of capital is small when compared to the total return on investment, leaving a total of 41.04% 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 September 30, 2016, to $47.00 a share from 0.43 cents, a 9.30% increase. It has now been paying dividends for at least 2 years and the stock's current yield is 2.57%. Gilead Sciences, paid out $2.45 billion in common dividends during the 12 months ended last quarter, accounting for 13.57% of cash flow and 16.25% of total earnings after taxes. This relatively modest payout is slightly higher than the 15.01% 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.