- Gilead kept its guidance intact which is encouraging for long term investors.Will it get back to $100 levels in the coming year.
- Biotech stocks are extremely oversold and technicals are saying that a bottom is at hand. So what does this mean for Gilead's stock price.
- Are Gilead fundamentals attractive for dividend investors as well ?
Gilead Sciences, Inc.(NASDAQ:GILD) announced its third quarter earnings this week and missed on earnings but had a slight beat with respect to its top-line. The company announced earnings of $2.7 on revenues of $7.4 billion which meant that sales dropped around 10% from the same quarter of 12 months prior. So, what should investors considering an investment in Gilead stock concentrate on? In my opinion, Gilead looks very attractive not only because of its fundamentals but other factors as well. Here's why.
Obviously, the elephant in the room is the HCV division where hepatitis C drugs (Harvoni, Solvaldi & Epclusa) collapsed to $3.3 billion in the third quarter although Epclusa beat estimates with sales of $640 million in the third quarter. Hepatitis C sales declines were compounded in the quarter with the cutting of Simtuzumab which was a hopeful pipeline candidate. Simtuzumab failed in recent liver studies and Eleclazine has also been sidelined as it did not come up to scratch either.
The health of the pipeline is really where investors need to be concentrating on when considering an investment. HCV declines are now already baked into the share price so the pipeline becomes critical at this point, so the growth rate of the HIV division and the pipeline become priorities from an investment standpoint. I believe it is fair to say that the culling of the above mentioned drugs probably means slightly less upside potential from these levels. Nevertheless, with an earnings multiple of 6.6 and a sales multiple of 3.2 ( Industry average 5.5), I still maintain Gilead will get back to $100 a share in the years to come.
First of all, I closely follow the SPDR S&P Biotech ETF (NYSEMKT:XBI) for an indication of where Gilead's stock price may go in the near term. Ultimately, Gilead's stock price will be driven by its fundamentals, but there isn't a doubt in my mind that a sizable percentage of Gilead's share price decline over the past 18 months has transpired as a result of weakness in the biotech sector in general.
Biotech Too Oversold But Holding Above Support Levels
If we look at the ETF chart below, we can see that we are at similar oversold levels on the RSI indicator to February when we rallied out of a hard intermediate bottom. Furthermore, the index is holding above the June lows (which to me is the line in the sand for biotech as it was its last intermediate bottom). Therefore once we get a swing low in this complex, getting long on Gilead seems a prudent move, especially when you take into account its cheap valuation compared with the rest of the market.
Sentiment Is Too Bearish For A Top To Form Here
Sentiment is also matching up to what the technicals are saying. I use sentiment as a contrarian tool where I tend to go long when sentiment gets to bearish extremes (what we have now) and go short when it is at bullish extremes. As in the chart shown below, sentiment is well below 30 which lines up to similar levels we had back in February. Again I believe that Gilead's stock will rise when the entire complex rises in earnest.
Source : Sentimentrader.com
Volume Has Spiked In Biotech's Leveraged ETF's
Another major sign of hard bottoms in the market is the volume in leveraged ETF's. If we look at the 3X leveraged Direxion Daily S&P Biotech Bull 3X ETF (NYSEARCA:LABU), we can see that we had a huge spike in daily volume on the 3rd of November. Furthermore, as the chart shows, this has been the biggest volume up day this year so far. Usually, strong volume days like these take place when a hard bottom is about to be formed.
HCV Sales Will Settle Down - HIV Growth Is Only Getting Started
So basically, this is what investors need to be looking at. Why? Because, when you combine the strength of Gilead's fundamentals along with the bullish technicals in this complex, then this stock looks like an attractive long play. Dividend investors should be particularly keen as its price to cash flow ratio has now dropped to 5.8. Furthermore,the company's debt to equity ratio came in at 1.38 in the latest quarter which again is attractive in this sector. The dividend yield is now 2.62% with the payout ratio being only 15.5% (Trailing 12 month average) which illustrates that there is plenty of upside for dividend increases. Personally, I project strong gains in the HIV space going forward (with the help of a Bictegravir approval) along with more growth from Epclusa and probable approval of GS-4997 in HCV space, which will result in the share price heading back towards $100 a share
To sum up, Gilead stock, in my opinion, looks very attractive here not just because of its own fundamentals but also because of how oversold biotech is at present. Watch the company's pipeline and HIV drug sales growth. These two areas will be the catalysts for future growth going forward.