A Growth Stock at a Huge Discount

We continue to be surprised by the market’s lack of appreciation for the continued fundamental improvement going on at Gilead Sciences (GILD). The company reported another superb quarter in which both profits and sales topped analyst’s estimates. The drug-maker grew EPS by 50% to 99 cents from 66 cents a year ago. Top-line growth was a healthy 36% to $2.09 billion thanks to strong sales of their two biggest HIV treatments, Altripla and Truvada. Analyst’s estimates called for EPS of $.96 on $2.07 billion in revs. However, GILD shares are indicated lower in after hours trading below $44 per share nearing the stock’s lowest point thus far in 2010.

At Ockham, we are reaffirming our Undervalued rating on GILD shares following another strong quarterly report. This is the seventh straight quarter where Gilead has topped Wall Street’s view. While analysts have been a bit too conservative in the past, it does not appear to be because they are overly bearish as a whole. According to Yahoo finance, there average analyst recommendation is 1.9 (1 being the most bullish out of 1-5 scale), and their average price target is $55 for the 21 analysts providing information to Thomson/First Call.

The company is outperforming the bullish analyst community’s targets quarter in and quarter out, yet the market has not moved the stock up anywhere near as well as the benchmark indexes. Over the last twelve months, GILD has returned just over 1% coming into the earnings release. Meanwhile, the biotechnology iShare (IBB) and NASDAQ Composite have returned 38% and 62% respectively over that time.

Readers who hoped to find the reason for such underachieving performance in this post will certainly be disappointed. However, we are reiterating our stance that this company is a growth stock with a price any value investor can stomach. Over the past ten years, Gilead Sciences has normally traded for a price-to-cash earnings multiple in the neighborhood of 22.2x to 35.4x for this company, but the current valuation is only 14.5x. Similarly, price-to-sales per share has historically been at extremely high levels of 8.2x to 13.2x, but the current price-to-sales per share metric of 4.9x looks like a bargain. We think it is easy to understand why Gilead has already bought back $160 million of the share repurchase authorization announced just last quarter.

About Ockham Research 645 Articles

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.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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