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Gilead Sciences, Inc. (GILD)

Health Care
Biotechnology

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

86.4

Top-Down

SectorNEGATIVE
IndustryPOSITIVE
SentimentPOSITIVE
FundamentalBUY
08/29/2014

$107.56

Dividend Yield
N/A
52 Wk High
$107.56
Market Cap
162,595.00
52 Wk Low
$58.90
Short Interest
Next Report
10/21/2014

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

The Company's Financials Show Very Solid Top and Bottom Line Growth in the Short and Long Term
Gilead Sciences, booked a total of $17.50 billion in revenue during the 12 months ended last quarter, which represents a remarkable 119.47% increase from the equivalent period ended three years ago, in which total revenue was $7.97 billion. Such strong sales growth momentum seems to have carried into the company's latest quarterly report, in which total revenue of $6.55 billion represented a 137.28% increase from the year earlier period's $2.76 billion. This kind of top line growth is typical of companies gaining market share and, if managed smartly, should produce strong profits in the next few quarters. Also based on its latest report, profits grew very strongly last quarter when compared to the year earlier period and when measuring full year results against those of three years ago. Its net income rose 373.15% to $3.66 billion in its most recent quarter from $772.60 million (excluding extraordinary items) in the year earlier period, while full year profit for the 12 months ended on June 30, 2014 of $7.46 billion was 173.20% higher than full year net of $2.73 billion reported three years earlier. The company's margins have been expanding very strongly over the last three quarters, especially during the last quarter where EBITDA, operating and net margins grew by an average 39.85% from a year earlier.
     The company reported earnings on July 24, 2014 that were 3.96% higher than the analysts' consensus estimate; however, the stock fell -0.55% 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 9.02% in the last six reports.

 

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

Assuming the Company's Fundamentals Don't Deteriorate in Coming Quarters, the Stock's Valuation is Acceptable at this Level
Shares of Gilead Sciences, are trading currently at 11.84 times forward 12-month earnings. This P/E ratio represents a 52.29% discount to the MarketGrader-calculated "optimum" P/E ratio of 24.83, which is based on the company's two-year EPS growth rate. According to this calculation, which looks at the company's growth across rolling 12-month periods, Gilead Sciences,'s earnings per share have grown at an impressive annualized rate of 64.59% in the last two years. The combination of such a high growth rate with an apparent margin expansion probably means the company has been gaining market share in recent quarters without sacrificing financial performance, evidenced by its superior overall Profitability grade. This combination offers a strong case for future gains in the stock price. The stock also trades at 11.84 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 78.80% of total stockholders' equity) are included into total assets. If they are, the stock's price to book ratio is a moderate 11.13, while removing intangible assets such as goodwill results in a much richer price to book ratio of 52.49, attaching very high expectations to the company's future earnings power. Based on the $4.35 in cash flow per share that the company has generated in the last four quarters, at its current price the stock trades at 24.75 times cash flow, a fair valuation justified by Gilead Sciences,'s fundamental strengths. Its price to sales ratio of 9.38, based on trailing 12-month sales, is 78.71% lower than the Biotechnology's average ratio of 44.05, 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. Based on this measure Gilead Sciences,'s $162.60 billion market cap is an acceptable valuation, representing a modest multiple of 19.91 times 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 $7.46 billion, equivalent to 42.64% of its sales in the period. The average operating margin for the Biotechnology industry was 10.12% during the same period, 450.47% below the company's 56.75%. Gilead Sciences,'s return on equity, based on trailing 12-month earnings, is not only outstanding at 46.38%, but it's higher than the 26.44% 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.
     In light of the company's strong performance its capital structure might be too conservative, with total debt being only a fraction of its total equity. Its long term debt accounts for only 33.12% of total capital. Gilead Sciences,'s core earnings, a very important measure of long term earnings power, have grown a remarkable 129.16% in the last twelve months relative to the equivalent period ended a year earlier. The company's twelve month trailing EBITDA--which looks at income before subtracting interest expense, income taxes, depreciation and amortization--was $10.56 billion compared to $4.61 billion a year ago.

 

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

Outstanding Cash Flow Indicators Show the Company Is Managed Smartly and in the Best Interest of its Shareholders
Gilead Sciences,'s cash flow grew considerably in its latest quarter to $4.19 billion, a 339.17% increase from $953.00 million reported in the year earlier period. This growth seems to be accelerating considering that in the last twelve months the company's cash flow was 135.13% higher than the twelve months ended a year ago, a nice increase but quite lower than the current pace. This upward trend should boost its margins and overall profitability in the next few quarters. The company's liquidity is not only remarkable but the current amount of debt it carries relative to the cash flow it generates from tis operations is even lower now than it was a year ago. Its net debt (total debt minus cash on hand) at the end of its last quarter was $741.42 million, a fraction of its $4.68 billion in EBITDA. This ratio fell by an impressive 96.17% from the year earlier period, when EBITDA was $1.22 billion. This situation affords the company many attractive options such as pursuing acquisitions without incurring much debt or rewarding shareholders through dividends or the repurchase of common shares, which would make future earnings more valuable. Also, in a few more signs that Gilead Sciences, is managing its balance sheet very conservatively, its total debt as a percentage of total capital was reduced during the last twelve months while its cash on hand grew. Total debt now represents 37.22% of total capital compared to 39.82% a year earlier, while the company had $8.80 billion in cash on hand last quarter, 284.68% more than it did at the end of the year earlier quarter. These developments enhance the company's substantial flexibility in pursuing future growth opportunities and improve total returns to its shareholders.
     An important indicator of management efficiency used by MarketGrader is Economic Value Added, or EVA, which measures each company's true return to shareholders after accounting not only for the cost of running the business (operating costs) but also the cost of the capital it employs. By measuring the real cost of capital, both equity and debt, EVA measures the creation of true economic profit. In this case Gilead Sciences, had $24.06 billion in invested capital in its most recent quarter, a combination of both equity and long term debt. However, the company's weighted cost of equity of 5.68% is much larger than the weighted cost of debt, which is 0.82%. When combined, the two result in a total cost of capital of 6.50%, quite low compared to the company's total return on invested capital of 41.28% based on 12-month trailing operating income. The result is an excellent economic value added of 34.78%, a very high return to investors after all capital costs are covered. Gilead Sciences, does not pay a dividend and hasn't done so within at least the last five years.

 

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