Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Gilead Sciences (NASDAQ:GILD) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Gilead's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Gilead's key statistics:

GILD Total Return Price Chart

GILD Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

75.5%

Pass

Improving profit margin

(3.2%)

Fail

Free cash flow growth > Net income growth

26.2% vs. 69.8%

Fail

Improving EPS

71%

Pass

Stock growth (+ 15%) < EPS growth

280.1% vs. 71%

Fail

Source: YCharts. * Period begins at end of Q1 2011.

GILD Return on Equity (TTM) Chart

GILD Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(6.7%)

Fail

Declining debt to equity

(22.1%) 

Pass

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
We first assessed Gilead last year, and it has since lost one more passing grade to finish with just three out of seven possible passes in its second assessment. The company's bottom-line growth has now outpaced the gains in its free cash flow, but both of these metrics fall far short of Gilead's screaming stock growth over our three-year tracking period. Is this high optimism sustainable, or will shares of this diversified drug-maker slip back to the strong (but far less strong) pace of Gilead's fundamental growth in the near future? Let's dig a little deeper to find out.

Gilead has been cashing in in a huge way on its first mover advantage in hepatitis C breakthroughs with blockbuster drug Sovaldi, which brought in an eye-popping $2.3 billion in sales for just the first quarter of 2014. My fellow writer Eric Thomasson notes that the company is pushing toward FDA approval for a one-pill combination Sovaldi-ledispasvir as treatment for the most common strain of hepatitis, which represents roughly 75% of all hepatitis cases in the U.S. Gilead already has the potential to generate over $9 billion in annual Sovaldi sales by 2017. However, Sovaldi's exorbitant price tag -- $84,000 for a 12-week treatment -- has had a disruptive impact on health-insurance and medical companies, which might expose Gilead to certain risks of pushback over the coming years. However, Gilead could already be winning its pricing and reimbursement discussions with the European Union's major national insurers, and also plans to enter the Japanese market next year, a year before expected EU approval.

Fool health care analyst David Williamson notes that Gilead has more positive momentum on its side with the CDC's recommendation for the use of its $13,000-per-year treatment Truvada for HIV infection prevention among at-risk patients. In addition, Gilead is also expected to receive approval for cancer treatment Idelalisib for relapsed refractory CLL/indolent non-Hodgkin's Lymphoma in the second half of the year, which will help diversify its revenue streams away from the hep-c cash cow.

My fellow writer Stephen Simpson points out that Gilead could face fierce competition in the hepatitis C treatment market from Merck (NYSE:MRK), which just announced a $3.9 billion acquisition of hepatitis C pure-play Idenix Pharmaceuticals (NASDAQ:IDIX). Idenix has a couple of hep C treatments in development, including nucleotide prodrugs called IDX21437 and IDX21459, and an NS5A inhibitor, Samatasvir. Merck might also combine its own clinical-stage hepatitis C drugs MK-5172 and MK-8742 with Idenix's IDX21437 to bring a fast-acting and pan-genotypic once-daily combo treatment to market. Idenix had filed a lawsuit against Gilead over Sovaldi, which allegedly infringes on one of Idenix's key patents. Gilead will may very well have to slash Sovaldi's prices for or invest heavily to differentiate it from Merck's new combo treatment.

AbbVie also filed new drug application paperwork for a next-generation triple-cocktail hepatitis C treatment, which is expected to receive FDA approval before year-end. Bristol-Myers Squibb has also been awaiting FDA approval for its hepatitis C treatment daclatasvir. Meanwhile, the FDA has lifted an almost year-long clinical hold on Achillion Pharmaceuticals' promising hepatitis C clinical candidate sovaprevir, which allows its phase 2 drug trials to continue.

Putting the pieces together
Today, Gilead has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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.