Shares of Gilead Sciences, Inc. (NASDAQ:GILD) have been disappointing for some time. GILD stock is down just 4.7% so far in 2017, but has tumbled more than 22% over the past year. Making matters worse, the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) is up 13% this year. Although many find Gilead stock attractive due to its valuation, others view it as a value trap.
But let’s try looking at some of the positives.
For starters, Gilead Sciences pays out a 3.1% dividend yield. Income-hungry investors are sure to see GILD stock pop up in their screeners when searching for yield. The company also continues to buy back tons of stock. But this is a sticky subject.
In 2016, the company bought back some $10 billion worth of stock. However, that didn’t stop shares of GILD from tumbling over 30% last year. Since mid-2015, shares have fallen 43% from $120. In other words, the buyback has not helped to stem the bleeding of the share price.
Bulls also argue about the valuation, as Gilead currently sports a price-to-earnings ratio of 6.8. This has constantly fallen over the years though, tumbling from a P/E ratio of roughly 30 down to sub-7 levels. Yes, the valuation is low, but that alone does not make it a stock to buy.
The Negatives for Gilead
As much as investors love a good value, this one looks like a trap. In fact, in March we labeled Gilead as one the “10 Stocks You’d Be Foolish to Buy Right Now.”
The reasoning was simple. GILD stock has been trading with a below-7.5x price-to-earnings ratio since early 2016. In that time, shares of Gilead have fallen from $90 to $67, a 25% decline. The reason? While sales have come down slightly, its net income has declined notably. Bringing in $13.5 billion last year was good, but not compared to the $18.1 billion earned in 2015.
The problem with Gilead is growth. Without a more exciting pipeline or an acquisition, GILD will continue to see its numbers fall. For instance, analysts expect sales to fall 18.7% this year to $24.7 billion. In 2018, they estimate another 8.1% decline.
On the earnings front, a 28.7% decline is expected in 2017, along with an 8.8% slide in 2018.
Those aren’t very encouraging numbers for investors buying the stock. With a P/E ratio of about 7X now and no adjustment to this year’s earnings, investors could be looking at a stock that trades at $57.75 next year. This would represent a decline of another 15%.
Trading GILD Stock
Although Gilead is still generating a fair amount of free cash flow, which is spent on dividends and buybacks, that hasn’t been enough to prop up the stock. Therefore, these catalysts are not strong enough to warrant a stock price appreciation.
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GILD reports earnings on Tuesday May 2. Unfortunately, there’s no telling what that will do to the stock price. Gilead’s rally over the 50-day moving average is a positive. Clearing the 21-day was also constructive. Unfortunately, these aren’t constructive enough. The 3.5% rally over rate past few days looks more like short covering ahead of the quarter than anything else.
Again, this doesn’t create a strong incentive to buy the stock. Previously serving as support, the $70 level may act as significant resistance in the future.
So as much as I want to like Gilead Sciences for its dividend, capital return and valuation, the stock is still sick. At some point, it will be a buy, but I would like to have confirmation in the charts and a reason from management for why it deserves to go higher. They could announce an acquisition or shift more free cash flow toward the dividend to make it more attractive, as just two examples. But until something changes, the stock’s likely to languish.
I’d rather be late to the rally and right, then early and wrong.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
