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Gilead Sciences, Inc. (GILD)

Health Care
Biotechnology

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

76.1

Top-Down

SectorNEUTRAL
IndustryPOSITIVE
SentimentNEGATIVE
FundamentalBUY
05/25/2016

$86.51

Dividend Yield
2.00%
52 Wk High
$122.21
Market Cap
114,830.00
52 Wk Low
$82.14
Short Interest
Next Report
07/26/2016

Market Growth LT A+
Market Growth ST D
EPS Growth A+
Growth Potential C
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 very strong long terms sales growth seems to have virtually ground to a halt during its latest quarter. The $7.71 billion in revenue reported by the company last quarter represents just 3.48% growth from the $7.45 billion it sold during the same quarter a year earlier. However, when looking at the longer term picture is is clear the company's sales growth has been remarkable for a while. Gilead Sciences, booked $32.43 billion in 12-month trailing revenue up to--and including--last quarter, 228.44% higher than what it sold in the equivalent period ended three years ago, a very impressive increase. Therefore it seems that the company's business deteriorated very rapidly most recently, stalling its otherwise impressive growth record. The next couple of quarters will be very important in determining if this marks a temporary slowdown as its 12-month trailing sales total calculation will substitute earlier periods of strong growth with more recent lower sales figures. 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 First quarter net fell 17.70% to $3.57 billion from the year earlier profit of $4.33 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 $17.34 billion for the 12 months ended March 31, 2016, a 503.84% jump from full year profit of $2.87 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 4.24%, represents a slowdown from its margin growth of the two previous quarters.
     Following the company's earnings announcement on April 29, 2016, in which it reported Third quarter results that missed the analyst consensus estimate by 3.50%, the stock fell 8.25%, 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 12.55% over such period.

 

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 7.24 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 49.03%. which translates into an optimum P/E ratio of 40.93, 82.30% 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 7.24 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 are trading at 9.12 times their book value, which is based on the company's stockholders' equity. However, MarketGrader's price to book value analysis is based on a company's tangible book value, which excludes goodwill and other intangibles from its assets. In this case, Gilead Sciences,s' intangible assets of $13.66 billion exceed its $13.40 billion in stockholders' equity by $266.00 million, which means its tangible book value is negative. This makes the shares' price to tangible book ratio meaningless. Thus, part of the risk of owning the company's shares lies in the possibility of a significant write-down of its intangible assets, which would automatically make its shares much more expensive than they currently appear to be. Based on the $13.13 in cash flow per share generated by the company in the last twelve months, at the current price of $86.51 the stock trades at 6.59 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its price to sales ratio of 3.60, based on trailing 12-month sales, is 90.86% lower than the Biotechnology's average ratio of 39.33, 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 $114.83 billion , only 6.22 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 $17.34 billion, equivalent to 53.47% of its sales in the period. The average operating margin for the Biotechnology industry was 8.42% during the same period, 676.65% below the company's 66.12%. Gilead Sciences,'s return on equity, based on trailing 12-month earnings, is not only outstanding at 129.43%, but it's higher than the 82.69% 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.
     Such impressive returns amply justify the company's leverage even though its total debt is 1.70 times its shareholder equity. Its long term debt, which represents 61.14% of total capital is very adequate and shouldn't raise any concerns at this time. 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 $23.32 billion, or 25.86% above the $18.53 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,' cash flow fell considerably during the latest quarter to $3.91 billion, a 31.36% decline from the $5.70 billion reported after the same quarter last year. What's more important and worth highlighting is the fact that up to the most recent quarter the company's twelve month trailing cash flow was growing very healthily, up 9.38% compared to the same period ended a year before. This marks a sharp slowdown in the company's business environment and is likely to put considerable pressure on its margins. At the end of last quarter the company's net debt to EBITDA ratio was 2.65, significantly higher than the year earlier ratio of 0.19. 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 $14.50 billion last quarter and EBITDA was $5.47 billion. During the same period Gilead Sciences,'s total debt went from accounting for 41.87% of its total capital to 63.01% in its latest quarter, while its cash on hand fell by 26.34%. 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 62.20% return on investment during the last four quarters, based on operating income for the period. The company had $34.48 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 3.85% is only slightly larger than its cost of debt of 1.71%. The combination of both, or 5.56% in total cost of capital is small when compared to the total return on investment, leaving a total of 56.63% 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 2.00%. The $2.46 billion Gilead Sciences, paid out in dividends during the last twelve months represents 14.19% of its after-tax earnings, a relatively small amount, yet a significant increase from the 10.35% payout in the 12 months ended just a quarter earlier. Total dividends paid in the last year also represent 13.27% of the company's total cash flow. The large payout increase doesn't raise any concerns about the company's liquidity since the overall payout level is still low and its fundamentals are generally healthy.

 

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