Is Gilead Sciences, Inc. Stock Still a Solid Value Play?

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GILD stock - Is Gilead Sciences, Inc. Stock Still a Solid Value Play?

Source: Gilead Sciences

After Gilead Sciences, Inc. (NASDAQ:GILD) reported quarterly earnings on Feb. 6, analysts did not bother to ask the company about its big Kite Pharmaceuticals acquisition. Instead, they noted its falling sales for its HCV drug. Investors may express disappointment, too. Although Gilead beat consensus in its fourth-quarter, a turnaround for the drug company, as measured by higher year-over-year sales is unlikely.

Gilead Reports Sharp Drop in Revenue

Gilead reported a 17.6% drop in revenue, to $5.949 billion, as product sales slumped 19.1% to $5.837 billion. Sales of antivirals fell 21% to $5.213 billion.

HIV and HBV products accounted for 56% last quarter. For the full year, these products accounted for $14.2 billion, up from 412.9 billion in 2016. The market will also take note of the company’s cash flow during the quarter. Gilead ended last quarter with $41.4 billion in cash, $29.5 billion in debt, and net cash of nil after it paid for Kite Pharma. For Q4 and the fiscal year-end, Gilead held $36.7 billion in cash and investments.

Despite year-over-year revenue declines, GILD beat consensus estimates on the revenue and earnings figures.

GILD Stock Weak Trading Action

On the markets, GILD stock is showing weakness: every run-up is met with a convincing sell-off that brings the stock down to the $65 – $70 range. In the latest run-up, chances are good that the stock will hold the $75 level. It traded recently at around $79 at a price-to-earnings ratio of ~9X and a forward P/E of 11.6X.

Markets completely ignored the revenue potential from Kite Pharma, largely because the unit will not add to revenue for a long while. Despite the future growth uncertainties, revenue is steady at $10 billion annually.

Gilead Share Buyback

Gilead had $8.2 billion marked for buying back shares. For the full year, it bought back 13 million shares at a cost of $954 million. While it paid out $2.7 billion in cash dividends, the company said on Feb. 6 that it would raise its dividend from $0.52 to $0.57 a share quarterly.

Income investors should express content: using the excess cash to pay a higher dividend is a better use of funds. It maximizes shareholder value while signaling that the mature business will support regular income for shareholders.

 

GILD’s Outlook

Looking ahead, interest rates are on the rise: 10-year bond yields signal higher rates ahead. Management must make sure its stock wins over income investors. The cash flow from its mature businesses will support such a move. For the 2018 year, management guided total sales in the range of $20 – $21 billion. The light outlook could put pressure on GILD stock. This is due to the lack of growth in the near-term and risks of the Kite Pharmaceuticals unit reporting disappointing clinical results.

Looking beyond six to nine months, Gilead’s sales in Asia are on the mend. It is on the cusp of finishing up many testing requirements for potential blockbuster drugs. It also still has deep pockets, since its balance sheet is flush with billions in cash. That leaves room for management to bid for undervalued biotech companies in the future.

In its HIV prevention research, GILD will post data of its Discover study next year. The study is in a Phase 3 trial, where patients receive Truvada or Descovy. The purpose of the study is to evaluate Descovy’s safety and effectiveness for reducing the risk of HIV infection when it is used as a pre-exposure prophylaxis.

Bottom Line

GILD stock has limited upside because it has no HCV product launch that would disrupt the market. Patient starts will keep declining, hurting sales. But the good news is that the decline is slowing.

If Gilead fights off competition and holds its market share, the company could report stabilizing revenue for HCV sales. At its current stock price of around $80 and a P/E below 10X, GILD stock suits income and value investors. The stock will not give explosive returns, but it will pay a steady dividend.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/is-gilead-sciences-inc-gild-stock-still-a-solid-value-play/.

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