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 While biotech and healthcare stocks have underperformed the broader
market all year, Gilead stands out for its low forward
price-to-earnings ratio, which is widely used by investors to value
stocks.
The stock closed at $89.53 on Thursday, having lost more than
one-fourth of its value since hitting an all-time high of $123.37 in
June.
That put the share price at 7.3 times earnings estimates for the
next 12 months. No other large U.S. pharmaceutical or biotechnology
company trades below a ratio of 10.9, according to Thomson Reuters
data.
Gilead's valuation in recent weeks has been the lowest since it
became a solidly profitable company more than a decade ago. Over the
past 10 years, the stock has traded at a forward price-to-earnings
ratio of 16.6 times, on average.
By other metrics, the stock does not look as appealing. Using a
measure of a stock's value called a PEG ratio, which factors in
Gilead's lackluster growth outlook and its price-to-earnings ratio,
the shares look at least twice as expensive as the average big
biotech stock, analysts' estimates show.
"People are just skeptical about the long term earnings power of the
company," said John Fraunces, co-manager for the Turner Investments
medical sciences fund in Berwyn, Pennsylvania, which does not own
Gilead shares.
VICTIM OF OWN SUCCESS
To an extent, Gilead is a victim of its own success. The company,
the largest biotech by market value at $120 billion, built upon a
leading HIV medicine franchise by adding hepatitis C treatments that
revolutionized care for the serious liver disease.
That medical advance was reflected in its financial performance.
From 2013 through last year, Gilead's sales tripled to nearly $33
billion, while earnings shot up more than six times to $12.61 per
share.
But investors are concerned that Gilead's hepatitis C franchise
sales may have peaked.
Earnings per share are expected to fall 3 percent this year with no
growth expected through 2019, while sales are expected to recede to
about $29 billion over the next four years, according to the average
estimate of analysts polled by Thomson Reuters.
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Gilead shares have declined 11 percent in 2016, though that is less
than the 19 percent drops for big biotech peers Biogen Inc <BIIB.O>
and Celgene Corp, while the Nasdaq Biotechnology Index <.NBI> has
fallen 27 percent.
Investors said the company's future could rest in part on what it
does with its balance sheet: Gilead amassed $26.2 billion in cash,
cash equivalents and marketable securities by the end of 2015.
The company's dividend yield sits at 1.9 percent, below the roughly
2.3 percent average for companies in the S&P 500 Health Care index,
while it bought back $10 billion worth of its stock last year.
A major acquisition of promising companies or new medicines could
help propel sales and earnings, but investors are worried about the
price of buying such growth. They had also fretted over the $11
billion Gilead paid in 2011 for Pharmasset, but that deal ended up
being the foundation for its hepatitis C franchise success.
"What investors are worried about is, 'Does management go out and
overpay for an acquisition?'" said John Toohey, head of equities at
USAA Investments in San Antonio, which owns Gilead shares.
The stock is "exceptionally cheap," Toohey said. "The (valuation)
gap is so big between Gilead and other stocks, we're willing to be
patient."
(Reporting by Lewis Krauskopf; editing by Linda Stern and Richard
Chang)
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