Gilead Sciences Announces Large Buyback

“Lastly Gilead Sciences is buying back $1 billion worth of its stock over the next year. This comes after better than expected results earlier this week…” — CNBC’s Squawk on the Street 1/29/2010

In an effort to lend support to their share price, which has been range bound for about a year now, Gilead Sciences’ (GILD) board of directors has approved up to $1 billion in stock repurchases through January of 2011. This comes only days after reporting a better than expected fiscal fourth quarter in which they beat estimates for the sixth straight quarter. Last quarter, the company earned $.93 per share after stripping out one-time costs, which was a substantial improvement from the 59 cents earned a year ago. They easily topped analysts’ projections of 85 cents per share thanks in part to better than expected sales of the company’s HIV drug Atripla as it became the company’s top seller.

For the year, Gilead Sciences earned $2.82 per share or 33% better than a year ago on sales growth of 31% to $7.01 billion. The company also paid off all of their long term debt obligations while at the same time nearly quadrupling its cash on hand to about $4 billion in the last quarter. It is clear that Gilead is achieving considerable success organically and could either use their cash to acquire a competitor or simply buy back some of the shares outstanding. They may also use their growing cash balance in order to fund research and development and support their pipeline.

It seems clear to us that a company with this kind of growth as well as a pristine balance sheet would command a nice premium in the market. However, our methodology shows that Gilead Sciences is actually quite cheap right now compared to their historically normal valuation. The recent history for this stock would show a normal price-to-cash earnings ratio would range between 23.5x and 37.3x, but the current multiple of cash earnings is only 16x. Similarly, price-to-sales metrics have normally been 8.8x to 14.2X, and currently rests at about 6.4x. Now, to be clear, we are not assuming that a stock will always revert to historical norms, especially in the case of a stock like GILD where the growth in the past was exponential. That being said, if the company were able to achieve just the bottom end of this range based on current fundamentals, it would imply a price of $66. Of course, the buyback would only make the fundamentals more attractive on a per share basis.

We have had an Undervalued rating on Gilead Sciences for quite some time because it has a unique combination of attractive valuation, strong growth, and financial strength. According to our methodology, this is one of the most attractive stocks in the biotech industry and deserves a further look by long term investors.

Gilead Sciences Announces Large Buyback

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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