|Market Growth LT||F|
|Market Growth ST||A-|
While Not Entirely Negative, Growth Indicators Show Several Signs of Weakness
According to its latest earnings report, Gilead Sciences, booked $2.79 billion in total revenue last quarter, a 16.69% rise from the year earlier period's $2.39 billion, which is not only a healthy increase but an improvement from its long term sales growth. Also including the latest quarter the company had $10.64 billion in 12-month trailing revenue, only 34.36% higher than the $7.92 billion booked during the equivalent period ended three years ago, a modest increase in such timeframe. The next couple of quarters will help investors determine if the recent increase in top line growth is sustainable and whether it will lead to higher profits. It also reported outstanding profit growth last quarter from the year earlier period, contrasting with a long term decline in full year profits, which we measure over a three year period. It therefore appears that the company is in the process of reversing its long term trend of falling profits. Gilead Sciences,'s Third quarter profit jumped 16.74% to $788.61 million from $675.50 million (excluding extraordinary items) reported in the year earlier period; on the other hand, also including its first quarter results, its 12-month trailing net income dropped 0.91% to $3.05 billion from the $3.07 billion it had earned in the 12 months ended three years earlier. The company has shown an improvement in margin growth during its last three quarters, including a modest 4.78% average increase in EBITDA, operating and net margins during its latest quarter compared to the year ago period.
The company's stock rose a moderate 2.41% after it reported earnings on October 30, 2013 that were 8.33% higher than what analysts were expecting. With this report it extends its positive earnings surprise record, having beaten analysts' estimates, on average, by 3.18% with its last six earnings reports.
|Price/Cash Flow Ratio||D|
Valuation Seems Very Rich Regardless of Company's Positive Fundamentals
Gilead Sciences,'s shares trade currently at 39.36 times the company's 12-months' trailing earnings per share, more than three times our "optimum" P/E of 14.67. This ratio is calculated by MarketGrader by looking at the last two years' quarterly earnings, in 12-month rolling periods, in order to determine their growth rate. On this account Gilead Sciences,'s earnings per share have grown at an annualized rate of 3.48% during this time. The company's small margin growth, together with its positive overall Profitability grade and its EPS growth rate could stem from small market share gains, a favorable indicator of future gains for the stock. The stock's forward P/E of 27.69, based on its earnings estimate for the next four quarters, represents a premium to the S&P 500 index's forward P/E of 15.20 but is lower than its trailing P/E of 39.36. Therefore value could apparently be found in the company's future earnings growth even though relative to the market the stock might not seem cheap (the fundamentals may already be factored into the price). But assuming the company remains fundamentally strong, the stock might have further room to run, or at least be a relatively safe place to be if earnings estimates materialize into actual reported results.
Gilead Sciences,'s are trading at 11.27 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 $13.22 billion exceed its $10.88 billion in stockholders' equity by $2.34 billion, 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. The company generated $1.82 in cash flow per share over the last twelve months, which translates into a 39.76 price to cash flow ratio. Such a rich multiple suggests investors have very high hopes that the company's strong fundamental performance continues in the future. Its shares also trade at 10.44 times its trailing 12-month sales, a small 95.30% discount to the Biotechnology industry average price to sales ratio of 223.83. Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. Gilead Sciences, lost $1.65 billion (even after adding back depreciation) in its latest quarter; comparing its $111.12 billion market cap to this number is not meaningful from a value perspective but the loss is meaningful in the context of our Profitability and Cash Flow indicators, which appear below.
|Return on Equity||A-|
|Quality of Revenues||C|
Company's Operations Are Very Profitable and Indicate a Solid Business Environment
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 $3.05 billion, equivalent to 28.62% of its sales in the period. Operating income during that same period accounted for 41.41% of sales, 238.09% higher than the average operating margin for the Biotechnology industry, which was 11.83%. Based on its trailing 12-month earnings, Gilead Sciences, return on equity of 27.99% is a very strong indicator of profitability and a positive reflection on the company's management efficiency. However, it represents a decline from the year earlier period's return on equity of 28.99%, possibly spelling a slowdown in the company's business.
Despite this moderate downturn the company's leverage is low enough that it could be increased without overburdening the company in order to ensure that current profitanility is sustained. Its total debt is only 0.67 times total equity while long term debt makes up 34.98% of total capital. 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 $4.70 billion, or 20.50% above the $3.90 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|
|Debt/Cash Flow Ratio||A|
|Interest Cov. Capacity||A+|
Company's Cash Flow Indicators Are Solid Across the Board but Offer Some Room for Improvement
Gilead Sciences, showed a small improvement in its quarterly cash flow during the latest period, in which it grew by 1.04% to $753.10 million from the $745.37 million reported in the same period last year. This is a marked improvement from the 11.05% 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 reduced significantly its net debt relative to its cash flow in its most recently reported quarter compared to the same period a year before. Its latest net debt to EBITDA ratio (with net debt being defined as total debt minus cash on hand) was 4.26, based on $5.22 billion in net debt and $1.23 billion in EBITDA, compared to a year earlier ratio of 6.41, a 33.52% reduction. This is a positive step for the company towards being self-reliant in paying down debt with the cash flow generated from operations or possibly increase leverage to fuel future growth. 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 40.19% of total capital compared to 50.48% a year earlier, while the company had $2.09 billion in cash on hand last quarter, 23.30% 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.
MarketGrader also measures the true economic profit generated by Gilead Sciences, during the past year by taking into account not only the costs of operating the business but also the cost of capital, both equity and debt. Based on 12-month trailing operating income, Gilead Sciences, had a total 26.33% return on $16.74 billion of total invested capital, which includes common and preferred equity as well as long term debt. Its total after tax cost of capital is heavily weighted towards equity, with a total after tax cost of 7.80% compared to a 1.09% cost of debt. The company's economic value added (EVA), which results from subtracting the 8.89% total cost of capital from its return on investment, is 17.44%. This is a solid return to shareholders for a one year period. Gilead Sciences, does not pay a dividend and hasn't done so within at least the last five years.