Why Gilead Is The Most Exciting Growth Opportunity In 2014 by Chuck Carnevale, F.A.S.T. Graphs

Introduction

Earnings drive stock price in the long run and Gilead Sciences, Inc. (NASDAQ:GILD) is entering a remarkable period of what could only be called astounding future earnings growth.  This has not gone unnoticed by the market, as the stock price has been on a steady ascent for the past several months.

Furthermore, there have been numerous articles published in the media discussing its future prospects and investment appeal.  Therefore, I will not rehash what has already been written about this potentially remarkable investment opportunity, but I will offer the following several links to articles I found most interesting:

Gilead: More Good News For This Biotech Juggernaut

Understanding The Excitement That Surrounds Gilead

A Re-Analysis Of Gilead After Q2 Results And The Early Idelalisib Approval

Gilead Sciences Q2 2014: All Is Good, More To Come At Medical Conferences Later This Year

With this article I will offer a comprehensive fundamental review that I believe supports my view that in spite of its recent price run-up, Gilead Sciences, Inc. (NASDAQ:GILD) remains a reasonably valued and exciting opportunity for those investors seeking maximum capital appreciation.   However, I will qualify this position by stating that my view is long-term.  In other words, there is always the possibility that current price may retreat over the short-run.  But, in the long run earnings determine market price and I believe the future earnings potential of Gilead is clear and well-defined.

Short Company Description

The following short business description on Gilead Sciences, Inc. (NASDAQ:GILD) provided courtesy of S&P Capital IQ:

“Gilead Sciences, Inc., a research-based biopharmaceutical company, is engaged in the discovery, development, and commercialization of medicines in areas of unmet medical need. The company has operations in North and South America, Europe and Asia-Pacific.

The company’s primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis B virus (HBV) infection and chronic hepatitis C virus (HCV) infection, oncology/inflammation and serious cardiovascular and respiratory conditions.

In the liver diseases area, the company received approval from the U.S. Food and Drug Administration (FDA) of new drug application (NDA) for Sovaldi (sofosbuvir 400 mg). Sovaldi is a once-daily oral nucleotide analog polymerase inhibitor for the treatment of HCV infection as a component of a combination antiviral treatment regimen.

The company also received approval of Tybost (cobicistat) and Vitekta (elvitegravir 85 mg and 150 mg), each a component of Stribild, from the European Commission. In the oncology/inflammation area, the company filed for FDA and European Medicines Agency (EMA) marketing approval of idelalisib (formerly GS-1101), an investigational, targeted, oral inhibitor of PI3K delta, for the treatment of patients with refractory indolent non-Hodgkin’s lymphoma (iNHL) and relapsed chronic lymphocytic leukemia (CLL). The company also continued to advanced research and development pipeline, with approximately 200 active clinical studies in 2013, of which approximately 60 were in Phase 3 clinical trials.”

Earnings Operating History

Up through 2013 Gilead Sciences, Inc. (NASDAQ:GILD) was a consistently fast-growing biotechnology company averaging 42.9% per annum earnings growth.  However, as the following graph reveals, earnings growth had significantly slowed down since 2011.  This simultaneously led to a very low valuation.  On the other hand, the company’s stock price went on a rapid ascent in 2013, perhaps in anticipation of what was soon to come.

Gilead Sciences

The following earnings only FAST Graphs™ on Gilead Sciences, Inc. (NASDAQ:GILD) illustrate the dynamic nature of a company’s earnings per share growth over different time periods.  Earnings growth is a dynamic calculation that varies when graphed from one timeframe to the next.  Consequently, it’s important to review several timeframes when evaluating a company’s historical earnings growth rate.  The following 15 calendar year, 10 calendar year, 7 calendar year and 5 calendar year graphs illustrate that although Gilead’s earnings growth has been consistently high over the years, it became explosive for 2014 and beyond (see earnings growth rates circled in yellow).  Note: growth rates include all estimates on the graph whether calendar or fiscal year. 

Earnings (Operating) History 15-Year

Gilead Sciences

Earnings Operating History 10-Year

Gilead Sciences

Earnings Operating History 7-Year

Gilead Sciences

Earnings Operating History 5-Year

Gilead Sciences

Current 15-Year Earnings and Price Correlated FAST Graph (with Normal P/E Ratio)

Gilead Sciences

Current 10-Year Earnings and Price Correlated FAST Graph (with Normal P/E Ratio)

Gilead Sciences

The key takeaway from the above earnings and price correlated graphs is that Gilead Sciences, Inc. (NASDAQ:GILD)’s quantum leap in earnings growth has not yet been fully credited by the market.  Consequently, based on earnings expectations the stock appears to represent a compelling long-term investment.

15-Year Historical P/E Ratio Trend

The dark blue line reflects the fiscal year-end P/E ratio for Gilead Sciences Inc since 2008 (the right scale on the graph).  Clearly we see that Gilead’s P/E Ratio had been consistently dropping due to lower-than-average earnings growth, and then began rising again in 2012 and 2013.  However, the current explosion in earnings growth has once again brought the P/E Ratio on Gilead back into attractive valuation levels.

Gilead Sciences

Performance

Historical performance is functionally related to earnings growth achievement and starting valuation.  Consequently, when performance is properly measured, it is imperative that starting valuation be considered in conjunction with earnings (and dividends, if any) growth.

A high beginning valuation will reduce capital appreciation; a low beginning valuation will enhance capital appreciation.  When a company’s beginning valuation is in alignment with earnings, capital appreciation will be highly correlated with the company’s earnings growth rate.

15-Year Performance:  From Beginning Undervaluation

Gilead Sciences

7-Year Performance:  From Beginning Undervaluation

Gilead Sciences

Earnings Forecasts

The “Estimated Earnings and Return Calculator” provides several specific future year’s earnings forecasts.  Specific near-term earnings forecasts (varies from two to four years) are provided to include the number of analysts reporting to S&P Capital IQ (yellow and green highlights).  Additionally, a long-term (three to five year) growth rate is also provided (orange highlights).  The specific number of analysts offering the long-term forecast is found in the FAST FACTS box (orange circle).

Therefore, we highly recommend placing more credence on the near-term forecasts because they are likely to be more accurate.  Moreover, near-term forecasts tend to include a greater number of analysts in the consensus.

The graph below reports consensus earnings of $7.99 for fiscal 2014 according to 26 analysts reporting to S&P Capital IQ followed by $9.27 for fiscal 2015 according to 27 analysts and $10.00 for fiscal 2016 according to 23 analysts. These near-term forecasts for earnings growth indicate that Gilead is extremely undervalued at current levels.

Gilead Sciences

Earnings Yield

Shareholders in publically traded companies, even though they are passive owners, can expect to be rewarded for their investment

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