Gilead Sciences (GILD -2.70%) and Pfizer (PFE -3.85%) are two of the most competent pharmaceutical companies in the industry. Both have impressively broad and advanced drug development pipelines, and both have a history of profitable operations, not to mention acceptable dividend yields above 3%.
Either stock could be a good anchor for a pharma portfolio. If there's only room for one, examining the details of each company's performance in the last five years will be helpful to decide which warrants a buy.
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The case for Gilead
Recently, Gilead has been in the headlines thanks to its much-discussed antiviral drug remdesivir, which appears to be somewhat beneficial for treating coronavirus infections in certain patient populations. But remdesivir might not be a reliable driver of growth for the company if competitors develop more effective therapeutics, so long-term investors should take care not to overestimate the drug's importance to Gilead's future.
It helps that Gilead was an attractive company well before the pandemic, with normalized trailing 12-month diluted earnings per share (EPS) of $3.90 in contrast with Pfizer's $1.98 and a robust profit margin of 21.8%, slightly trailing Pfizer's 28.8%.
Likewise, Gilead's price-to-free cash flow (FCF) ratio is 11.1, which compares favorably to Pfizer's 15.9 (a lower ratio here means that Gilead share would account for more cash flow than one Pfizer share if the stocks were the same price). Furthermore, though its trailing 12-month dividend yield is very close to Pfizer's, Gilead's dividend yield growth of 69.5% in the past five years is much larger than Pfizer's 8.8%, suggesting that Gilead management has been working hard to deliver larger returns to its shareholders.
The case for Pfizer
Much like Gilead, Pfizer's most recent major project is its coronavirus vaccine, which is currently in a combined phase 2/3 clinical trial. Should Pfizer successfully commercialize its vaccine, it could capture tremendous growth from the subsequent global sales.
As a pharma stock, Pfizer has not expanded as rapidly as some investors might prefer. The company's stock has grown by 21.5% in the last five years, a commanding lead over Gilead's contraction of 29.1%. Stock price aside, Pfizer's ability to turn earnings into growth appears similar to Gilead's at first glance, with both companies exhibiting a similar return on assets (ROA) slightly above 8% in the past year.
However, over the past five years, Pfizer's return on assets (ROA) increased by 104%, a stunning advantage over Gilead's, which fell by nearly 81% in the same period. This may mean that Pfizer's leadership has become more effective at picking fruitful investments in the long term, or it may be that Gilead's leadership has gotten worse.
In the same vein, though Gilead may have the advantage today in terms of its trailing 12-month normalized diluted EPS, Pfizer's EPS growth has been much more impressive, up 37.5%, while Gilead's collapsed by 67.4% between July 2016 and the present. There's no guarantee that Pfizer's leadership will be able to continue this trend, but if it does, the gaps between it and Gilead will continue to widen in Pfizer's favor.
Finally, in the most recent quarter, Pfizer's price-to-book ratio was 3.35, making it somewhat less expensive than Gilead's 4.19, but certainly not a bargain.
The verdict
While I wouldn't say that Pfizer is a uniformly better company than Gilead, I think that at the moment it's a better buy as a result of its superior EPS growth and ROA growth, both of which indicate that the company is becoming more efficient at its core business and also at delivering for its shareholders over time.
The wild card is each company's coronavirus project. If Pfizer's vaccine doesn't make it through clinical trials, its investment will be wasted, and remdesivir's performance may help Gilead to close the gap between the two stocks.
