• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Healthcare

Beaten-Down Gilead Is My Top 2017 Pick

Shares are dirt cheap as revenues and profits have grown.
By DAVID KATZ Jan 05, 2017 | 10:00 AM EST
Stocks quotes in this article: GILD

As value investors, we rarely get a chance to buy dynamic biotech companies since they typically sell at 20x (or more) earnings. In the last two decades, in those rare cases where a biotech company has sold for under 10x earnings, we have ultimately done quite well on the investment. We think Gilead Sciences (GILD) represents one of those opportunities today and feel the stock is a "table-pounding" buy. 

By simple valuation metrics, the shares are dirt cheap. The company sells at 6.6x 2016's EPS of $11.40, 6.9x 2017's EPS of $10.87, and pays a 2.5% dividend. Beyond selling at a great price, the company has leading drug franchises in the HIV and hepatitis C markets and has a respectable pipeline. It also has a solid balance sheet with $4 billion of net cash, strong free cash flow at $14 billion per year and a top-tier, shareholder-oriented management team. 

A little color: 

Gilead's revenues and profits have grown dramatically in recent years with the launch of Sovaldi and Harvoni. These have been wonder drugs that have been able to fully cure patients with hepatitis C infections in less than a year. As the business has matured and is in the gradual process of decline, investors have exited the stock. 

However, we think the investment community has overreacted. For one, the hep-C franchise will still be a big producer of revenue in the coming years. It's not going to be the $15 billion drug franchise at its peak, but it won't go to zero. It should bottom out in the $8 billion to $10 billion range by the end of the decade. 

On other fronts, the company has made great strides at enhancing its HIV franchise in recent years with the launch of newly updated therapies based on the TAF trials. These updated products should extend the life of the HIV franchise past previous estimates. GILD reported much-better-than-expected HIV revenues during the recent third quarter with sales coming in at $3.5 billion vs. $3.3 billion for the projections. 

Moreover, GILD has several opportunities in its pipeline to materially add to revenues and earnings. The largest opportunity is bringing a hepatitis B therapy to market using NASH drug regimens. The company has several late-stage drug trials in hep B that can potentially amount to a multibillion-dollar drug franchise. To date, hep B is incurable and deadly. 

Beyond this, management isn't just resting on its internal pipeline to bring new drugs to market. The firm is actively engaged and willing to make a string of acquisitions or even a larger acquisition to enhance Gilead's product portfolio. Based on its balance sheet and cash flow, GILD can easily consummate a deal or several deals valued at up to $30 billion without coming even close to stretching its finances.

 Management is committed to taking actions that return Gilead to growth. When this does happen, the shares should meaningfully revalue from the current 6.6x to 6.9x earnings multiple to the low teens or even better. 

Beyond this compelling investment case as an independent company, we also think there is an outside possibility that GILD could fall prey to a mega-sized pharma firm looking to steal the company. 

Our fair value on GILD is well north of $110 per share, but would expect to review that price with an eye toward raising it, if the business progresses as we expect it to in 2017 or if the company makes a well-received acquisition, which would further boost long-term prospects. 

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Katz was long GILD, although positions may change at any time.

TAGS: Investing | U.S. Equity | Healthcare | Stocks

More from Healthcare

An Update on My Top Small-Cap Pick and What It Means for the Overall Market

James "Rev Shark" DePorre
Sep 26, 2023 11:30 AM EDT

The good news is that the corrective action is advancing and opportunities are developing.

Moderna's Chart Messages Are Frustrating the Bulls

Bruce Kamich
Sep 19, 2023 9:20 AM EDT

The technical indicators suggest that traders should wait until a bottom pattern plays out in the shares of the vaccine maker.

This Biotech Stock Pick Is Just Starting to Make Beautiful Music

Bret Jensen
Sep 15, 2023 9:00 AM EDT

Things have started to turn up for this midcap name. Look for these shares to end the year on an up note.

UnitedHealth Shares Are Not Looking All That Healthy

Bruce Kamich
Sep 14, 2023 11:05 AM EDT

Let's take the temperature of this important Dow component.

Moderna: Is It Time to Take a Shot?

Bruce Kamich
Sep 13, 2023 12:52 PM EDT

Let's review the trends, charts and indicators.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:13 PM EDT BRUCE KAMICH

    8 Trading Rules from T. T. Hoyne

    You just read the header for this missive and prob...
  • 08:42 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How Elite Traders Make Big Profits
  • 02:58 PM EDT BRUCE KAMICH

    Classic Trading Rules From Bernard Baruch

    Bernard Baruch listed the rules (below) in his aut...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login