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Gilead Sciences, Inc. (GILD)

Health Care
Biotechnology

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

73.7

Top-Down

SectorNEUTRAL
IndustryPOSITIVE
SentimentNEGATIVE
FundamentalBUY
04/24/2017

$66.25

Dividend Yield
2.91%
52 Wk High
$102.29
Market Cap
86,604.70
52 Wk Low
$65.59
Short Interest
Next Report
04/27/2017

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

Mixed Growth Record Based on Company's Recent Reports Suggest Investors Use Caution in Buying the Stock
Gilead Sciences,'s recently reported $7.31 billion in revenue booked during the last quarter marks a sharp reversal from an excellent long term growth trend. This latest report represents a 14.01% decline from the $8.51 billion in revenue reported by the company during the same quarter a year ago. By comparison, it booked $30.32 billion in revenue in the 12 months ended also last quarter, 170.17% higher than what it did in total sales during the equivalent period three years earlier, or $11.22 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 Fourth quarter net fell 33.63% to $3.11 billion from the year earlier profit of $4.68 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 $13.50 billion for the 12 months ended December 31, 2016, a 339.08% jump from full year profit of $3.07 billion reported for the period ended three years earlier. The company's ongoing margin contraction accelerated during its most recent quarter in which its EBITDA, operating and net margins fell an average of 12.42% from the year earlier period.
     The company's positive earnings surprise on February 08, 2017, 3.85% above the consensus view, failed to excite investors as the stock fell 10.31% following the announcement, suggesting the report offered poor guidance for future quarters. In light of this reaction to a positive earnings surprise it's important to consider how this latest release affected the company's overall grade beyond earnings per share considering its earnings surprise record is still positive; over the last six quarters it has reported earnings that have been, on average, 3.56% higher than the consensus estimate.

 

Capital Structure D
P/E Analysis A+
Price/Book Ratio B
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 7.98 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 41.14%. which translates into an optimum P/E ratio of 30.24, 73.60% 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 7.98, 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, current market value is 17.81 times its total book value, which seems reasonable. However, when goodwill and other intangible assets are subtracted from the company's total assets, the price to book ratio jumps to a much higher 4.66. This happens because intangible assets account for 73.87% of Gilead Sciences,' total stockholders' equity. Based on the $12.56 in cash flow per share generated by the company in the last twelve months, at the current price of $66.25 the stock trades at 5.27 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its price to sales ratio of 2.86, based on trailing 12-month sales, is 91.59% lower than the Biotechnology's average ratio of 34.03, 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 $86.60 billion , only 5.91 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 $13.50 billion, equivalent to 44.53% of its sales in the period. Operating income during that same period accounted for 61.32% of sales, 751.22% higher than the average operating margin for the Biotechnology industry, which was 7.14%. Based on how much it has earned in the last four quarters, the return on Gilead Sciences,'s common equity has been a remarkable 71.48% during this time, even though this is below the 97.70% 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.
     Despite this downturn the company's leverage still seems adequate, with total debt 1.40 times larger than total equity. Its long term debt makes up 58.25% of its total capital, which is sustainable assuming current levels of profitability are maintained. Gilead Sciences,'s core earnings have shown a significant slowdown in the company's business based on twelve month trailing EBITDA of $20.54 billion. This represents a 12.26% decline from the same period ended a year earlier in which the company's core operations generated $23.41 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,'s cash flow declined significantly last quarter to $3.49 billion, 28.48% lower than the year earlier quarterly cash flow of $4.87 billion. This marks an accelerating decline from twelve month trailing cash flow, which fell to $16.67 billion in the period ended last quarter, 18.00% lower than the $20.33 billion in the year earlier period, underscoring the ongoing deterioration of the company's business. The company's net debt to EBITDA ratio jumped from 1.27 a year ago to 3.23 in the latest reported quarter, based on net debt (total debt minus cash on hand) of $14.45 billion and EBITDA of $4.48 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 54.48% of its total capital to 58.24% in its latest quarter, while its cash on hand fell by 18.57%. 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.
     Our Economic Value indicator is another gauge used by MarketGrader to measure how efficiently management employs the capital invested in the business. As of last quarter, Gilead Sciences,'s had $45.23 billion in total invested capital, which included all common and preferred equity as well as long term debt. The weighted after tax cost of each part of the capital structure was roughly the same, with a 2.13% total cost of equity and 1.68% cost of debt, both adding up to a total 3.81% after tax cost of capital. The company's return on invested capital, based on its 12-month trailing operating income was 41.10% following the latest quarterly report, which means that after subtracting the total cost of capital mentioned above, Gilead Sciences,'s generated 37.29% in economic value added during the same period, a very strong return. This could be considered as the company's true economic profit in the last year since it accounts not only for the costs of running the business (operating) but also the cost of the capital it employed. The company hiked its quarterly common dividend in its latest quarter, reported on December 31, 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 2.91%. Gilead Sciences, paid out $2.46 billion in common dividends during the 12 months ended last quarter, accounting for 14.73% of cash flow and 18.18% of total earnings after taxes. This relatively modest payout is slightly higher than the 16.25% 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.