Leading antiviral treatments have made Gilead Sciences (NASDAQ:GILD) more profitable than any of its Big Pharma peers, but the stock is trading at bargain-bin prices. Sales of its lead product have fallen in recent quarters, and investors are wondering if now is a good time to buy or stay on the sidelines. Here are a few charts to help you decide for yourself.
Although Gilead Sciences was already putting up big sales with leading HIV treatments, trailing revenues have more than tripled since its hepatitis C antiviral, Sovaldi, earned FDA approval at the end of 2013.
At just $32.37 billion, Gilead's revenue over the trailing-12-month period is below five of the world's largest pharmaceutical companies, and less than half that of the world's largest healthcare conglomerate, Johnson & Johnson.
When it comes to the bottom line, though, Gilead Sciences has them all beat. With trailing net income of $16.35 billion, it has the largest bottom line in healthcare. In fact, among the 10 largest companies in the S&P 500, only five produced more profit over the past year.
Rather than bloat up with enormous acquisitions, Gilead Sciences has been using its massive cash flows to increase shareholder returns through stock repurchases. While we all prefer to see a rise in the numerator used to calculate earnings per share, shrinking the denominator has the same effect.
Over the past four reported quarters, Gilead spent around $15.1 billion buying back about 154 million shares of its own stock. A 341.8% increase in quarterly net income since Sovaldi's approval less than three years ago is stunning, but shareholders' slice of quarterly profits have risen by a far more exciting 460.9% over the same period.
That denominator is about to get even smaller. In February, Gilead's board authorized an additional $12 billion for share repurchases, and about $8.1 remained at the end of June. At recent prices that's enough to buy back about 100.7 million shares, or about 7.6% of the total outstanding.
In addition to repurchases, the company began paying a quarterly dividend of $0.43 per share in the second quarter last year. It's since raised the payout to $0.47 without increasing its overall obligation. Because of the reduced share count, Gilead spent about $7 million less making dividend payments in the second quarter this year compared with the same period last year, despite giving 9.3% more to each shareholder.
Gilead's management has been on the receiving end of criticism for avoiding big acquisitions in favor of its own stock. To these critics I'd like to point out that Pfizer went down this road in 2009, purchasing Wyeth with $68 billion in cash, stock, and debt. Last year, Pfizer earned $1.13 per basic share, or $0.06 less than it earned the year before the Weyth acquisition.
Pfizer's shareholders had it rough, but my heart bleeds for Merck & Co. investors. Its trailing EPS was about one-third higher before announcing a $41 billion acquisition of Schering-Plough in 2009 than it is today.
One of the biggest reasons Gilead has favored its own shares over other assets is their insanely low multiple. Incoming competition in the hepatitis C space has knocked Gilead's trailing earnings down to $11.35 per share from a peak of $11.91 at the end of last year, but the stock is still trading at about 7.1 times trailing earnings.
Past performance doesn't guarantee future success, but Gilead's ability to grow in the face of competition surprised the market not long ago. Sovaldi-based combination pill Harvoni earned approval in October 2014, but pessimism about the its future took hold when AbbVie earned approval for its hepatitis C combo, Viekira Pak, a couple of months later. Gilead's trailing P/E ratio plunged below 14, as Harvoni wiped the floor with Viekira Pak.
Another competitor, Zepatier, from Merck has since entered the ring, but Gilead just launched its best hepatitis C combination yet, Epclusa. It's the only pill that can treat all six genotypes of the virus, and the competition pales in comparison.
The market clearly undervalued Gilead Sciences during the months following Harvoni's launch, and I think it's wrong again. This time the stock is so cheap, earnings could remain flat into eternity, and it would still provide market-beating returns over the long run.
Cory Renauer owns shares of Gilead Sciences and Johnson & Johnson. You can follow Cory on Twitter, @TMFang4apples, or connect with him on LinkedIn for more healthcare industry insight. The Motley Fool owns shares of and recommends Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.