On August 6, 2023, Gilead Sciences Inc (GILD, Financial) experienced a day's change of 4.17%, with the stock price at $78.68. The company's Earnings Per Share (EPS) stood at 4.35. But how does this translate to the company's intrinsic value? Is Gilead Sciences (GILD) fairly valued? This article provides a comprehensive valuation analysis to answer these questions. Keep reading to gain valuable insights.
Unraveling Gilead Sciences Inc (GILD, Financial)
Gilead Sciences develops and markets therapies to treat life-threatening infectious diseases, with a primary focus on HIV and hepatitis B and C. The company's portfolio has expanded to include pulmonary and cardiovascular diseases and cancer, thanks to acquisitions of Corus Pharma, Myogen, CV Therapeutics, Arresto Biosciences, and Calistoga. Their acquisition of Pharmasset brought rights to hepatitis C drug Sovaldi, which is also part of combination drug Harvoni. Moreover, the Kite, Forty Seven, and Immunomedics acquisitions boost Gilead's exposure to cell therapy and noncell therapy in oncology.
As of the aforementioned date, Gilead Sciences (GILD, Financial) had a market cap of $98.1 billion. The GF Value, an estimation of the stock's fair value, was $71.89, indicating that the stock was fairly valued. This valuation provides a foundation for a deeper exploration of the company's value.
Deciphering the GF Value
The GF Value is a proprietary measure that indicates the intrinsic value of a stock. It is computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the ideal fair trading value of the stock.
Our GF Value estimates Gilead Sciences (GILD, Financial) as fairly valued. This is based on historical multiples, an internal adjustment factor reflecting past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, it may be overvalued and could yield poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, it may be undervalued and could offer high future returns.
Considering Gilead Sciences' market cap of $98.1 billion and the current price of $78.68 per share, the stock appears to be fairly valued. This suggests that the long-term return of the stock is likely to be close to the rate of its business growth.
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Gilead Sciences' Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy its stock. A good starting point is the cash-to-debt ratio and interest coverage. Gilead Sciences has a cash-to-debt ratio of 0.23, which is worse than 75.44% of companies in the Drug Manufacturers industry. GuruFocus ranks the overall financial strength of Gilead Sciences at 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies carries less risk, especially if they have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Gilead Sciences has been profitable for 10 years over the past 10 years. During the past 12 months, the company had revenues of $27.4 billion and Earnings Per Share (EPS) of $4.35. Its operating margin of 47.9% is better than 98.46% of companies in the Drug Manufacturers industry. Overall, GuruFocus ranks Gilead Sciences's profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Gilead Sciences is 7.1%, which ranks better than 54.26% of companies in the Drug Manufacturers industry. However, the 3-year average EBITDA growth rate is 5.8%, which ranks worse than 57.61% of companies in the same industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Gilead Sciences's ROIC was 18.92 while its WACC came in at 5.52.
Conclusion
In summary, the stock of Gilead Sciences is estimated to be fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 57.61% of companies in the Drug Manufacturers industry. To learn more about Gilead Sciences stock, you can check out its 30-Year Financials here.
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