First, a mea culpa
I've neglected stockAday for the last 2 months, as my day job has been testing. So to get back in the swing of things, let's do a retrospective.
The benefit of hindsight
A year ago, we wrote Gilead: was it just a fad? $GILD.
The stock was at $81 and we asked:
Having sewn up the HIV market, they then captured the Liver (Hepatitis C) market. No wonder the long-term investor has a 5-bagger on their hands. But is the stock a 2-hit wonder and now a value trap?
Today the stocks at $83. :( So value trap it was.
Key Stats
| Ticker | $GILD |
|---|---|
| Sector | Bio Therapeutic Drugs |
| Latest price | $83.27 |
| Value | $109B |
| Daily vol | $675M |
| Date | 25 September 2017 |
| Links | SEC Filings, gilead.com |
What's 12 months to a pharma giant?
Here's how the key figures changed
| $GILD | a year ago | today | change |
|---|---|---|---|
| Target price | $105 | $83 | -21% |
| Sales forecast | $30.5bn | $25.9bn | -15% |
| Earnings forecast | $11.75 | $8.78 | -25% |
| PE ratio | 7x | 9x | +43% |
So forecasts have been trashed, the stock's treaded water, the valuation has increased... though at 9x it is clearly still "depressed"!
Who's Gilead anyway?
Let's recap on who they are:
Gilead Sciences is a biopharmaceutical company. Its portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases (Hepatitis C), cancer, inflammatory and respiratory diseases and cardiovascular conditions.
Here's the last 5 years and the forecasts for the next 2
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Revenue | $9.7bn | $11.2bn | $24.9bn | $32.6bn | $30.4bn | $25.9bn | $22.9bn |
| EPS | $1.64 | $2.01 | $7.95 | $12.37 | $10.08 | $8.78 | $7.49 |
But the forecasts are really not that representative... since Gilead is in the process of an $12bn deal to acquire $KITE. Wow. $12bn for a cancer business that should do $40m of sales this year. And the stock jumped on the deal.
Why the renewed optimism?
Here's what Wikipedia says about Kite Pharma:
Kite Pharma is a publicly held, clinical-stage biopharmaceutical company engaged in the development of novel cancer immunotherapy products with a primary focus on engineered autologous T cell therapy designed to restore the immune system's ability to recognize and eradicate tumors.
So it's a therapy where our own cells are modified, and then used to seek and destroy cancer. If this proves to work... then Gilead will be a 3 trick pony!
But you'd better believe that, if you are going to ride the stock. Here's their deal presentation from the company.
Is there a margin of safety?
With sales and earning expected to fall in 2018, the stock's trading on 11x 2018 earnings, and although that's a bargin versus the sector, there are others in a similar rut (e.g. Pfizer, Abbvie and Amgen).
| Big pharma | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| GILD.O | $108,745M | 9x | -8% | 3% | 14% |
| PFE | $214,146M | 14x | 6% | 4% | 10% |
| MRK | $177,633M | 17x | 6% | 3% | 8% |
| ABBV.K | $139,451M | 16x | 14% | 3% | 8% |
| AMGN.O | $135,544M | 15x | 4% | 2% | 10% |
| CELG.O | $112,572M | 20x | 22% | 0% | 3% |
| BMY | $103,906M | 21x | 9% | 2% | 8% |
| LLY | $92,384M | 20x | 11% | 2% | 7% |
Sure the cashflows are attractive, but it doesn't feel like Kite is going to lift the ship until 2019 at the earliest. In it's press release, Gilead said:
The transaction will provide opportunities for diversification of revenues, and is expected to be neutral to earnings by year three and accretive thereafter.
i.e. no positive impact to their bottom line until 2020. Therefore, I don't see a margin for safety, yet! And with Wall Street saying their target price is $83, they don't seem convinced either.
What's another year?
The excitement of KITE has now passed. Volumes are returning to trend... there was an increase to sales guidence back in late July, and no one cared.
Sure, the hot money abandoned Gilead over the last two years, as the stock's gone ex growth. And it's hard to see it returning, until there's evidence that Kite's going to soar!
But who wants to join the hot money. Shouldn't we do our own research? If Kite's a cure, then we'd best get ahead of the momentum trade. Kite's first product should be approved at the end of this year in the US. Then Europe in 2018. They are gearing up for a commerical launch and have the manufacturing all preped.
I want to believe in Kite. But I fear it's another rocky year ahead. I suspect the results of the core business will continue to weigh on the stock. For now, I'm going to pass.
When the KITE deal closes at the end of the year, I'll revisit. But for now, I don't see a margin for safety or near term catalyst.
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted September 25, 2017 at 08:08AM by shane_stockflare http://ift.tt/2wNN9dy
