Well Rounded Investor

My journey of becoming financial independence by 35 years old

Recent Buy – GILD

*Note that this is a speculative play as I bought it prior to earning. This company doesn’t qualify as an Aristocrats or Dividend King. In general, I also don’t like to buy pharmaceutical companies. However, I like the current P/E of 7.58 with forward P/E of 6.82. It’s a “scream buy” in my book, and I don’t have to look at what drugs the company is selling. Roadmap2retire discuss “scream buy” recently on his 2016 outlook article.

This is probably my last buy for before The Lunar New Year! So Happy New Year, Everyone!

I purchased 10 shares of Gilead Sciences, Inc. (GILD) on 2/2/16 at $83.06 per share.  It’s trading near the 52-week low. I’m buying a battered stock.

52-Week Range $ 82.28 – 123.37

Summary

  • Gilead Sciences, Inc. is a biopharmaceutical company that discovers, develops, and commercializes a variety of medicines designed to transform and simplify care for people with life-threatening diseases.
  • The company currently primarily focuses on HIV and hepatitis C treatments, with operations in more than 30 countries.
  • Harvoni and Sovaldi, hepatitis C treatments, generated approximately 58% of fiscal year 2015 product sales.
  • The two drugs still account for nearly 58 percent of Gilead’s revenue, though only about 770,000 patients worldwide have been treated with the drugs to date. Worldwide, an estimated 185 million people are infected with the liver-destroying virus.

  • Revenue distribution: United States, 73%; Europe, 22%; and other countries, 5%.

Fundamentals

GILD sports some of the most unique and robust fundamentals I’ve ever seen, especially in regards to the growth and the speed at which the company has increased revenue and profit.

Revenue was $2.028 billion in FY 2005. The company grew that to $32.15 billion in FY 2015.

Profitability & Growth : 9/10

Operating margin (%) 66.47
Net-margin (%) 53.78
ROE (%) 105.87
ROA (%) 44.13
ROC (Joel Greenblatt) (%) 625.27
Revenue Growth (3Y)(%) 41.70
EBITDA Growth (3Y)(%) 55.60
EPS Growth (3Y)(%) 60.60
  • Earnings per share is up from $0.43 to earning reported on 2/2/16 is at $3.32 for the Q4 2015 making EPS 2015 at $10.98/share.
  • GILD doesn’t have a lengthy dividend growth track record. As such, it’s a somewhat speculative play.
  • GILD will face other competition in the Hepatitis drugs.
  • But the company announced an initial quarterly dividend of $0.43 in February 2015. And with the earning release the company announced that it will continue to seek growth through partnerships and acquisitions. The company also increased its dividend by 10 percent, and said it would buy back an additional $12 billion of its stock in 2016. Last year it repurchase $15 billion.
  • The board also approved a cash dividend of 43 cents per share for the first quarter and raised the dividend to 47 cents starting in the second quarter.

  • The stock yields 2.07% on my purchase price, which doesn’t offer much income. So this is a play for plenty of dividend growth as well as total return over the long haul.
  • With a payout ratio of just 15.8%, there’s a ton of room here for the dividend to grow, if the company decides to increase the payout next year February.
  • The company’s balance sheet is really solid. The long-term debt/equity ratio is 0.71 and their interest coverage ratio is north of 35.53.
  • Net margin as see the above table is 53.78%

Risks

As someone who’s in the healthcare industry, I fully know about the risks that pharmaceutical companies would face:

  1. Competition and patent is the number one concern. Although the majority of GILD’s blockbuster drugs in HIV and HCV are protected by patent for years to come, there is no stopping other drug companies won’t develop a very similar drugs and selling it for cheap.
  2. Pressure from foreign governments to offer treatments at extremely affordable prices. Compulsory licensing is an omnipresent threat in many developing countries where cheap medicine is in high demand.
  3. Operating in the healthcare field means there is constant risk of litigation and regulation.
  4. Gilead has had to offer heavy discounts on some of their products, especially their HCV treatments. Their high cost has received some backlash from government agencies and pharmacy benefit managers, which has led to pricing pressure.
  5. Pressure to maintain a robust pipeline of new drugs to replace lost revenue when other key medicines go off patent and face increasing competition from branded and generic drugs alike. GILD spent approximately $2.9 billion in R&D 2014, much of which went to clinical studies.
  6. HCV medicines are cures, rather than lifelong treatments. As patients are cured, they no longer have need to use GILD’s medicines.

Valuation

The stock’s P/E ratio is 7.58, which compares extremely favorably to the five-year average P/E ratio of 20.9. In addition, that’s well below that of the broader market and the biopharmaceutical industry.

According to this article publish Jan 14, 2016

Peter Lynch value gives the stock a fair price of $273, giving the stock a margin of safety of 64%.

The stock is trading with a PE ratio of 8.46, higher than 90% of companies in the Global Biotechnology industry and is currently 24.99% below its 52-week high and 7.60% above its 52-week low.

The company is a research-based biopharmaceutical company that discovers, develops and commercializes new medicines for different medical sectors.

The stock is part of six guru portfolios; the company’s largest shareholder among the gurus is Pioneer Investments (Trades, Portfolio) with 0.23% of outstanding shares, followed by John Rogers (Trades, Portfolio) with 0.09%, Joel Greenblatt (Trades, Portfolio) with 0.07% and Ken Fisher (Trades, Portfolio) with 0.04%.

GILD appears severely undervalued to me at this price.

Conclusion

  • I take this oppotunity at the market sell off to pick up GILD at what I feel is an extremely compelling long-term value.
  • Again, it’s a speculative play960-gilead-sciences-inc-won-approval-for-hiv-drug-from-fda
  • They certainly have the fundamentals, growth, track record, and willingness to return value to shareholders.
  • This purchase will add $17.2 to my annual dividend. The 10% dividend increase will make it $18.92.

Full disclosure: I’m long GILD.

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One comment on “Recent Buy – GILD

  1. DivHut
    February 4, 2016

    I recently added GILD and AMGN to my watch list. It’s a sector that I do not have much exposure too but am considering it going forward. Based on the numbers GILD looks like an amazing buy these days. Of course these stocks are very volatile. Nice buy and thanks for sharing.

    Like

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