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Gilead Sciences, Inc. (GILD)

Health Care
Biotechnology

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

73.2

Top-Down

SectorNEUTRAL
IndustryPOSITIVE
SentimentNEUTRAL
FundamentalBUY
11/16/2017

$72.41

Dividend Yield
2.80%
52 Wk High
$85.47
Market Cap
94,587.00
52 Wk Low
$64.12
Short Interest
Next Report
10/31/2017

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

While Not Entirely Negative, Growth Indicators Show Several Signs of Weakness
Gilead Sciences, has been struggling with anemic sales growth for some time and now, based on its latest quarterly report, it has dipped into negative territory. The company had total revenue of $27.44 billion in the 12 months ended last quarter, only a modest 32.19% gain from three years earlier, when total revenue in the equivalent 12 month period was $20.76 billion. And now sales have started to decline as evidenced by the 12.93% year-over-year decline recently reported by the company. It said in its latest announcement that last quarter's total sales were $6.54 billion compared to $7.51 billion a year earlier. These results underscore a very worrisome trend marked not only by a recent downturn in Gilead Sciences,'s business but also an inability to show sustainable long term growth that could lead to higher profits. It reported also that profit fell last quarter from the year earlier period, impacting also long term profit growth, which has been anemic in the last three years. We base long term profit growth on the change in full year (12-month trailing) net income from the comparable period three years before. Gilead Sciences,'s Third quarter net fell 18.38% to $2.72 billion from the year earlier profit of $3.33 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 $11.60 billion for the 12 months ended September 30, 2017, a 23.34% jump from full year profit of $9.41 billion reported for the period ended three years earlier. The company's margins have been shrinking steadily during the last three quarters, albeit at a slower rate during the latest period. Its EBITDA, operating and net margins fell on average by 9.68% in the latest quarter versus the year ago period.
     The company reported earnings on October 27, 2017 that were 6.57% higher than the analysts' consensus estimate; however, the stock fell 2.43% following the announcement. Despite a cool reaction from investors, this latest report helped ensure the company maintains a positive earnings surprise record, having exceeded analysts' expected earnings by an average 4.62% over the last six quarters.

 

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

The Stock's Valuation is Attractive Based on the Company's Overall Financial Strength
Trading currently at 10.16 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 40.56%. which translates into an optimum P/E ratio of 28.84, 64.76% 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 10.16, 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 current share price seems inexpensive compared to its book value, trading at a 3.84 price to book ratio. However, when intangible assets such as goodwill, which account for a full 53.52% of the company's total shareholders' equity, are subtracted from its total assets, the stock's price to book ratio increases quite significantly to 8.27, a richer multiple. Based on the $9.58 in cash flow per share generated by the company in the last twelve months, at the current price of $72.41 the stock trades at 7.56 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its price to sales ratio of 3.45, based on trailing 12-month sales, is 90.09% lower than the Biotechnology's average ratio of 34.82, 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 $94.59 billion , only 7.40 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 $11.60 billion, equivalent to 42.27% of its sales in the period. The Biotechnology industry had an average operating margin of 7.83% in the period. The company's operating margin of 57.73% exceeded that average by 629.66%. Based on how much it has earned in the last four quarters, the return on Gilead Sciences,'s common equity has been a remarkable 46.69% during this time, even though this is below the 89.38% 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.
     Assuming these numbers reflect a recent downturn in the company's business, it'll be important that it maintain its healthy capital structure in which long term debt accounts for 52.55% of its total capital. Its leverage is manageable with total debt being only 1.18 times its total equity. Gilead Sciences,'s core earnings have shown a significant slowdown in the company's business based on twelve month trailing EBITDA of $17.72 billion. This represents a 19.48% decline from the same period ended a year earlier in which the company's core operations generated $22.01 billion. EBITDA is used as a measure of earnings power because it includes non-operating charges like interest expenses, income taxes and depreciation and amortization, which aren't even cash expenses. All of these are included in several areas of our analysis that look at EPS 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 $2.69 billion, a 37.78% decline from the $4.33 billion reported after the same quarter last year. This extends an accelerating decline in the company's profitability since its cash flow has also fallen in the last twelve months to $2.69 billion from the $4.33 billion during the twelve months ended a year earlier, a 30.05% drop. 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 $192.00 million, a fraction of its $4.25 billion in EBITDA. This ratio fell by an impressive 98.42% from the year earlier period, when EBITDA was $5.18 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 54.08% of total capital compared to 61.61% a year earlier, while the company had $29.07 billion in cash on hand last quarter, 137.00% 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 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 30.26% return on investment during the last four quarters, based on operating income for the period. The company had $52.36 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 3.94% is only slightly larger than its cost of debt of 1.54%. The combination of both, or 5.48% in total cost of capital is small when compared to the total return on investment, leaving a total of 24.78% 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, 2017, to $52.00 a share from 0.47 cents, a 10.64% increase. It has now been paying dividends for at least 2 years and the stock's current yield is 2.80%. Gilead Sciences, paid out $2.67 billion in common dividends during the 12 months ended last quarter, accounting for 21.12% of cash flow and 23.00% of total earnings after taxes. This relatively modest payout is slightly higher than the 21.36% 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.