- Gilead has excellent fundamentals and margins. These margins are sustainable through constantly improving products.
- Gilead is cheap historically and could break out at any moment.
- The Biotech sector will blast past its 2015 highs and Gilead will most certainly follow.
What I have learned in investing over the years is that if one scales into a position at the wrong time, the end result is always pain no matter how well the initial fundamentals stack up. A professional investor doesn't just look at the fundamentals and valuation of the respective company but also looks at the fundamentals of the sector. This is why Gilead Sciences, Inc. (NSDQ:GILD) looks very attractive to me at present especially after its first quarter results this year which clearly disappointed the markets.
Nevertheless, investors have to look at the big picture here and not just one quarter. Yes, HCV sales suffered surprisingly in the first quarter but Q1 2015 was a huge quarter in this area as patient demand drove the market. We didn't get that demand last quarter as both the US and European markets suffered double digit losses. However, it has to be only a matter of time before the franchise is approved in China and recent press-releases such as "Steven Wang" should speed up the approval process. Therefore, here are three strong reasons why Gilead should be part of your portfolio going forward..
Gilead Will Have A head-start With its New Meds offerings
Firstly, the fundamentals of the company stack up in a big way in my opinion. In this industry, patents are critical to earnings as popular drugs become the norm. Some analysts believe that Gilead will suffer when its HIV franchise will undergo patent expiration in 2018 and 2021 but I don't see it this way. First of all, the company serves more than three quarters of the US treated HIV patients and has a proven experience in discovering drugs and developing them. These attributes are not going to go away just because the company has some important patents expiring. For example, look at how Sovaldi which came out of the Pharmasset acquisition has turned out to be a big success. Furthermore, (and the company is doing it already) Gilead will raise the price of its old drugs in an attempt to switch patients to its new next generation drugs. The more patients it can switch between now and when its patents expire, the better it will be for its new drugs going forward..
One Of The Cheapest Stocks In Biotech
Secondly, from a valuation point of view, the stock has rarely been cheaper. In fact, its earnings multiple of 7.4 is almost 3 times lower than its 5 year average and 5 times lower than the industry's average. Furthermore, its sales multiple of 3.9 and price to cash flow ratio of 6.9 are also extremely attractive when you study the company's balance sheet. Earnings this year ($12.06) are expected to be slightly lower than last year but 2017 looks bright. If analysts earnings expectations are met, it would return the company to annual earnings growth. The float has dropped to 1.33 billion shares through strong share buybacks and the dividend yield is 2.17%. The one outlier is the company's debt to equity ratio which stands at 1.57 but most of the companies in this sector are levered above this level at present. As long as profits continue to rise, holding this debt (and some more) will not be a problem.
Volume Is Very Large In Biotech At Present
In terms of the sector, we can see in the chart below that the triple ETF in this sector, Direxion Daily S&P Biotech Bull 3X ETF (NYSEARCA:LABU) has had elevated volume for quite a while as the sector has been putting in a strong rounded bottom. A rising biotech sector will be a huge tailwind for Gilead and with the S&P 500 (INDX:SPAL) breaking out to new highs, I believe it will be only a matter of time before the biotech sector does the same. That is when Gilead stock should explode to the upside due to its strong fundamentals and weak valuation.
To sum up, Gilead looks very promising at present due to its fundamentals, valuation and growth in the biotech sector. Gilead is a cheap company in a booming sector. Its HIV franchise is not in danger and I'm confident newly approved products such as Genvoya will be able to take up the mantle to keep competition at bay. Other meds such as Solvaldi and Harvoni enjoy stellar margins because no other competitor can currently match the quality. The more biotech continues to rally, the higher Gilead will go. In fact over the long term, it should outperform the biotech index.