Gilead Sciences Stock A Buy On Compelling Valuations

• Gilead’s large shares repurchase demonstrates that the company considers its stock a bargain at the current price.
• Considering its strong growth potential Gilead stock is significantly undervalued.
• The average target price of the top analysts is at $107, an upside of 31.3% from its August 23 close price.

The recent decline in Gilead Sciences, Inc’s (NSDQ:GILD) hepatitis C drugs sales has worried investors who have also been disappointed by the fact that the company has been very cautious in taking a decision about new major acquisitions. Many investors believe that Gilead could return to high growth only through a major acquisition. The company has a strong balance sheet, and it is generating substantial cash flow.

Cash flow from operating activities was $4.9 billion in the second quarter. As such, Gilead has enough resources to make a significant acquisition when the opportunity arises. On the first quarter conference call, CFO Robin Washington explained that the company would continue to make acquisitions when the right opportunities present themselves. Also on the call, CEO John Milligan, clarified that while the company prefers friendly acquisitions, it is not unwilling to go hostile.

Meanwhile, the company has focused on share repurchases. During the first six months of 2016, Gilead spent $9.0 billion on stock buybacks. In fact, in the last year, Gilead has spent about $11.5 billion on share repurchases, by far the highest level among all healthcare companies, as shown in the table below. That compared to about $5.1 billion share buyback by Biogen Inc (NSDQ:BIIB) the second-highest ranked healthcare company by the amount spent on share repurchases in the last year, and about $3.8 billion by Johnson & Johnson (NYSE:JNJ), the third highest ranked healthcare company, by this criteria.

In my view, the fact that Gilead has been spending such an enormous amount on share repurchases demonstrates that the company considers its stock at the current price as a bargain.

The twenty healthcare companies with the highest share repurchase in the last year

Source: Portfolio123

Gilead’s HIV Drugs

On August 22, Gilead announced that the European Commission has granted marketing authorization for once-daily Truvada in combination with safer-sex practices to reduce the risk of sexually acquired HIV-1 infection among uninfected adults at high risk, a strategy known as pre-exposure prophylaxis, or PrEP.

In the announcement, Professor Jean-Michel Molina, MD, PhD, Hôpital Saint Louis in Paris said:

“In the past 30 years, we have seen significant progress in the way we treat HIV; however, infection rates have continued to rise. In 2014, we saw the highest number of newly diagnosed cases in the European Union ever recorded, with 94 percent of those with known cause transmitted through sexual contact. Truvada for PrEP provides an additional prevention tool, which when used with safer-sex practices, will help uninfected adults at high risk of HIV protect themselves against the virus.”

Gilead’s HIV drugs continued to outperform in the second quarter of 2016 increasing sales by 15% year-over-year. HIV and other antiviral product sales were $3.1 billion compared to $2.7 billion for the same period in 2015 primarily due to increases in sales of its newer and better-tolerated tenofovir alafenamide (TAF) based products. Genvoya, the first of these new HIV drugs, achieved sales of $302 million in the second quarter and $158 million in the previous quarter which was the first quarter that the drug was available for sale after its approval in November 2015.

As I see it, the marketing authorization which allows for the marketing of Truvada for PrEP in all 28 countries of the European Union could increase the demand for Gilead’s HIV Drugs significantly.

Source: Second Quarter 2016 Earnings Slides

Gilead Stock Performance

Since the beginning of the year, Gilead stock is down 19.5% while the S&P 500 Index has gained 7.0%, and the Nasdaq Composite Index has gained 5.0%. However, since the beginning of 2012, GILD stock has gained an astounding 305%. In this period, the S&P 500 Index has increased 73.9%, and the Nasdaq Composite Index has risen 101.9%. According to TipRanks, the average target price of the top analysts is at $107, an upside of 31.3% from its August 23 close price, which appears reasonable, in my opinion.

Source: Gilead Stock Price by uniquefinance.org

Gilead Stock Valuation

Considering its strong growth potential, in my opinion, Gilead stock is significantly undervalued. Gilead’s trailing P/E is very low at 7.15, and its forward P/E is even lower at 6.97. The price to free cash flow ratio is very low at 7.36, and the Enterprise Value/EBITDA ratio is also very low at 5.61.

Gilead started to pay a dividend in the second quarter of 2015. The forward annual dividend yield is at 2.31%, and the payout ratio is only 15.2%.

In my opinion, such a significant discount cannot be sustainable, and sooner or later investors will find out that Gilead stock is considerably undervalued which will cause its stock price to rise sharply. After all, Gilead has a rich pipeline of over 25 different programs under development, and it is increasing its research and development expenses. Gilead’s rich pipeline is creating opportunities that may allow the transformation of the treatment of many diseases, like NASH, HPV, inflammatory diseases, certain cancers, and cardiovascular conditions for which few, if any, options exist.

Conclusion

In my view, the fact that Gilead has been spending enormous amounts on share repurchases demonstrates that the company considers its stock a bargain at the current price. Considering its strong growth potential Gilead stock is significantly undervalued. As I see it, such a significant discount cannot be sustainable, and sooner or later investors will find out that Gilead stock is considerably undervalued which will cause its stock price to rise sharply. After all, Gilead has a rich pipeline of over 25 different programs under development, and it is increasing its research and development expenses. The average target price of the top analysts is at $107, an upside of 31.3% from its August 23 close price, which appears reasonable, in my opinion.