Gilead Sciences: Buy It For The Recession, Buy It For The Dividend (NASDAQ:GILD) | Seeking Alpha
Justin Sullivan A few days ago, I published an article about amgen inc. (amgn) and in that article I pointed out how important it is right now to identify recession-proof companies. In the coming quarters and years, it will not be important to identify companies and stocks that can generate high growth rates in the short term, but to identify stocks that can help us protect our investment. And not only could Amgen be a good choice during a bear market and recession, but so could Gilead Sciences (nasdaq:gild). Reading: Is gilead stock a buy Similar to Amgen, Gilead Sciences also outperformed the S&P 500 (SPY) as well as the Nasdaq-100 (QQQ) in the last twelve months. Gilead Sciences did not perform as well as Amgen in the last twelve months, but it did outperform the general stock market. And as we are expecting a steep recession and brutal bear market in the coming quarters, Gilead Sciences can be a solid investment. The company will perform quite well during a recession and as the stock is trading for rather low valuation multiples, the downside risks also seem limited. Looking at the latest quarterly results (for the first quarter of fiscal 2022), Gilead Sciences could report lackluster results. The company could increase total revenue from $6.423 billion in the first quarter of 21 to $6.59 billion in the first quarter of 22, resulting in a year-over-year growth of 2.6%. most of the revenue comes from product sales with only $56 million coming from royalties, contracts, and other income. and total product sales, excluding veklury, were $4.998 billion, up 2.3% from the prior year. Gilead Sciences Q1/22 Presentation And while revenue could be up a bit, revenue from operations was down quite a bit, from $2.89 billion in the same quarter last year to just $197 million this quarter. The reason is a $2.7 billion “in-progress research and development impairment” related to assets acquired by Gilead Sciences from Immunomedics in 2020. And, unsurprisingly, net income also decreased from $1,729 million in the first quarter of 21 to just $19 million in the first quarter of 22 resulting in a decrease in diluted earnings per share from $1.37 to $0.02. however, non-gaap diluted earnings per share increased 3.9% year over year from $2.04 in the same quarter last year to $2.12 this quarter. Guidance for fiscal year 2022 was almost unchanged compared to the previous quarter. Diluted earnings per share (on a GAAP basis) are now expected to be only in a range between $3.00 and $3.50, reflecting impairment related to assets acquired by Gilead Sciences from Immunomedics. Gilead Sciences Q1/22 Presentation Total product sales for fiscal 2022 are expected to range from $23.8 billion to $24.3 billion. Veklury’s sales are expected to be around $2 billion for the full year, but since Veklury already generated $1.535 billion in sales in the first quarter, the forecast might be too pessimistic. See also : What is a Dividend Reinvestment Plan (DRIP)? | Bankrate When looking at longer time frames and trying to estimate what growth rates might be realistic, we need to look for potential new blockbusters as well as products with a high risk of revenue decline. One of the reasons Gilead Sciences struggled in the past was the fact that growth from new products was offset by declining revenue from existing products. and of course we can’t rule out declining revenue from current products (veklury sales could decline in the next few years) but the products that generate the most revenue for gilead sciences right now are at least protected by patent for several years. Only Descovy is patent protected until 2025 in the US and 2026 in Europe, and Trodelvy’s patent is due to expire in 2023 in the US, but Gilead Sciences is confident that the patent extension will be granted until 2028. Gilead Sciences 2021 10-K But it won’t be as big of an issue for Gilead Sciences when it loses patent protection for descovy, as sales already appear to shift to biktarvy, which generated $2.151 billion in sales in the first quarter of ’22 and grew 18% year over year. after year. -year mainly due to higher demand. Descovy could also increase sales by 4% year-on-year driven by higher demand and prices, but Biktarvy has a 43% market share in the US, eight times the market share of the closest competitor. and biktarvy could also gain 500 bps in market share in the last 12 months. It’s also worth noting that the hiv treatment market is still below pre-pandemic levels. And not only biktarvy could contribute to growth in the coming years, the two cell therapy products yescarta and tecartus are also growing at a solid rate. yescarta sales in the first quarter of 22 increased 32% year-over-year to $211 million and tecartus sales increased 103% year-over-year. Gilead Sciences Q1/22 Presentation and one of the most promising candidates is trodelvy, which already generated $146 million in sales in the first quarter of fiscal year 2022 (with a year-over-year growth of 103%). but Gilead Sciences sees broad potential for trodelvy across multiple tumor types and lines of therapy, and therefore peak sales of trodelvy are estimated to be between $1.5 billion and perhaps even $5 billion. but in addition to growing the bottom line, gilead sciences could also grow its bottom line through share buybacks, and over the last 10 years, share buybacks have also been an important capital allocation tool that management was using and the number of shares outstanding was reduced by 20%. however, in recent quarters the number of shares outstanding has stagnated quite a bit, and in fiscal 2021 the company spent only $546 million on share buybacks, and thus much lower amounts than in previous years. Gilead Sciences is generating huge amounts of free cash flow, and management can use the free cash flow to buy back shares again for years to come. In recent years, the company has used much of its free cash flow for acquisitions, such as the $21 billion immunomedicine deal or the $12 billion purchase of kite pharma, which so far they have not worked. of course trodelvy and yescarta are already generating revenue and both come from acquisitions. however, the revenue from these products is still not enough to justify the offers. and although gilead sciences has been struggling in recent years and the potential for growth in the coming years is doubtful (theoretically there is growth potential, but there was also theoretical growth potential in recent years), there is at least at least two reasons to buy the stock right now: the dividend and the upcoming recession (and valuation could be a third reason). See also : The 5 Best-Performing Tech Stocks of 2016 – TheStreet It’s also worth mentioning that Gilead Sciences is getting more and more interesting for its dividend. Due to a steadily rising dividend over the past few years and a stock price that is declining (or staying fairly low), the dividend yield increases over time. Right now, Gilead Sciences has a very attractive dividend yield of 4.7%. At the moment the company is paying a quarterly dividend of $0.73 and since Gilead Sciences started paying dividends in 2015, management increased the dividend every year and the 5 year dividend growth rate is 7.78%. comparing the current annual dividend of $2.92 to earnings per share of $3.58 over the last four quarters, we get a payout ratio of 82% which doesn’t seem very sustainable. however, earnings per share can be a bit misleading due to the “in-progress research and development impairment” mentioned above. instead, we can compare $3,633 million paid in dividends over the last four quarters to free cash flow of $9,953 million and get a much more sustainable payout ratio of 37%. When looking for companies to invest in during a recession, we often turn to healthcare companies, as they seem like an obvious choice during recessions. And it’s no surprise that health care companies (including pharmaceutical companies) do well during economic downturns. People get sick, too, and considering the mental stress during a recession and economic downturn due to job losses, declining asset values, or potential home losses, people can get even sicker. Looking at the chart, we can see that revenue is fairly stable. and when incomes were declining, there was no connection to a recession. revenues decreased mainly in recent years (due to decreased sales of harvoni and sovaldi). free cash flow and earnings per share have also fluctuated in recent decades, but I don’t see a clear connection to a recession. Similar to many other healthcare companies, the pharmaceutical company Gilead Sciences is also a great pick for a recession and past results indicate a solid performance during the next recession. A final step in every analysis is to determine an intrinsic value for which a stock can be purchased. it’s not enough to just identify a recession-proof business, we also need a stock that is trading at a reasonable price because a stock that is trading for extremely high valuation multiples is also not a good investment during a bear market (and recession) like these actions usually receive harsh punishment. As a basis for our calculation, we can use free cash flow for the last four quarters, which was $9,953 million. Assuming Gilead Sciences won’t be able to grow any further in the next few years and will only be able to generate free cash flow similar to today’s through perpetuity, we get an intrinsic value of $78.87 for Gilead Sciences and the stock is clearly undervalued at this point (assuming a 10% discount rate and 1,262 million diluted shares outstanding). Gilead Sciences’ free cash flow could even decline a bit and the shares could still be fair value. certainly the stock is valued as a business that is struggling to grow or a business that could even decline, and looking at the performance of the last few years, this could be justified. time and time again, we hoped that the sciences of gilead could finally go further and get back on the path of growth again. but so far, it didn’t happen. And it’s more than understandable when investors are running out of patience with Gilead Sciences (or have lost it a long time ago). and of course an investment in gilead sciences is not completely worthless – we earn quarterly dividends and a dividend yield of close to 5% is a solid return in this market. not great, but better than nothing. In the event of a recession, Gilead Sciences seems like a good fit, as pharmaceutical companies can often keep revenues (and earnings per share) more or less flat. And in the case of a recession and a bear market, it’s already an achievement when a stock doesn’t fall and $60 looks like a strong support level for Gilead Sciences. if the stock were able to maintain that level for the next two to three years (combined with quarterly dividends), it would be more than enough to outperform the stock market. And while we never know what might happen, a lower share price for Gilead Sciences doesn’t seem fundamentally justified. Source: https://amajon.asia
quarterly results
growth
share repurchase
reason to buy: dividend
reason to buy: recession
reason to buy: valuation
conclusion
Category: Stocks
