Undervalued Gilead Sciences, FCF/EV Yield 14%, Shareholder Yield 7% – All Investable Stock Screener

One of the cheapest stocks in our All Investable Stock Screener is Gilead Sciences Inc (NASDAQ:GILD).

Gilead Sciences, Inc. (Gilead) is a research-based biopharmaceutical company that discovers, develops and commercializes medicines in areas of unmet medical need. The Company’s portfolio of products and pipeline of investigational drugs includes treatments for Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome (HIV/AIDS), liver diseases, cancer, inflammatory and respiratory diseases and cardiovascular conditions.

A quick look at the company’s share price over the past twelve months (below) shows that the stock price is down 12%, and down 20% from the twelve month high of $88.85 on July 25, 2016. While there’s been much criticism about Gilead over the past twelve months, for mine the stock remains clearly undervalued. Here’s why.

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As always I like to start with company’s latest balance sheet.

A quick look at Gilead’s latest balance sheet, dated March 2017, shows that the company has cash of $10.285 Billion and marketable securities totaling $3.830 Billion, or $14.115 Billion in cash and cash equivalents. Gilead also has total debt of $26.321 Billion. Therefore, the company has a net debt position of $12.206 Billion (total debt minus total cash and cash equivalents) and minority interests of $476 million. With the company’s current market cap of $92.614 Billion that means Gilead has an Enterprise Value of $105.296 Billion ((debt + minority interests) minus cash and cash equivalents).

Now, if we take a look at the company’s latest income statements we can see that Gilead generated $17.467 Billion in trailing twelve month operating earnings*, which equates to an Acquirer’s Multiple of 6.03, or 6.03 times operating earnings*. That’s cheap.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

If we move on to the company’s latest cash flow statements we can see that Gilead generated Operating Cash Flow of $15.464 Billion for the trailing twelve months and had Capex of $689 million which equates to $14.775 Billion in Free Cash Flow. This means that the company is currently trading on a FCF/EV ratio of 14%. Moreover, when you consider that the company’s trailing twelve month revenues are $29.101 Billion that means that Gilead has converted every dollar of revenue into fifty cents of free cash flow due to the fact that the company maintains such high gross margins of 86% and operating margins of 58%.

What also seems to get overlooked regarding Gilead is that it has a Buy Back Yield of 4% and a Dividend Yield of 3%, which equates to a total shareholder yield of 7%. When we take a look at the financial strength indicators we can see that the company has a Piotroski F-Score of 5, an Altman Z-Score of 3.73, and a Beneish M-Score of -3.04. So Gilead is financial sound.

To summarize, despite the significant drop in the company’s share price over the past twelve months, Gilead’s revenues and profits are not far off its 2016 levels. The company currently has trailing twelve month revenues of $29.101 Billion, which is slightly less that its 2016 FY revenues of $30.390 Billion. Its trailing twelve month net profits are $12.637 Billion, which are slightly below its FY 2016 profits of $13.501 Billion and the company is extremely well run with considerable gross and operating margins of 86% and 58% respectively. This is what provides the company with the ability to generate loads of free cash and convert every dollar of revenue into fifty cents of free cash flow.

And, there’s no question that Gilead is currently cheap trading on a P/E of 7.5, a FCF/EV Yield of 14%, and an Acquirer’s Multiple of 6.03, or 6.03 times operating earnings. Add to this the fact that Gilead is financial strong and provides a total shareholder yield of 7% and you have a bargain.

Disclosure: I am long GILD.

Article by Johnny Hopkins, The Acquirer’s Multiple

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”