Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – December 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Gilead Sciences Inc. (GILD) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Gilead Sciences, Inc. (Gilead) is a research-based biopharmaceutical company that discovers, develops and commercializes medicines. Gilead’s primary areas of focus include human immunodeficiency virus (HIV)/AIDS, liver diseases, such as hepatitis B and C and cardiovascular/metabolic and respiratory conditions. The Company has operations in North America, Europe and Asia Pacific. The Company’s products include Atripla, Truvada, Viread, Complera/Eviplera, Emtriva, Hepsera, Letairis, Ranexa, Lexiscan/Rapiscan, AmBisome, Vistide, Macugen, Cayston and Tamiflu. In January 2012, the Company acquired Pharmasset, Inc. On February 8, 2013, its subsidiary, acquired YM BioSciences Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$52.79|
|Value Based on 0% Growth||$30.95|
|Market Implied Growth Rate||10.46%|
|Net Current Asset Value (NCAV)||-$1.66|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Gilead Sciences Inc. does not pay a dividend.
Gilead Sciences Inc. is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the lack of earnings stability over the last ten years, lack of dividend payments, and the high PEmg and PB ratios. The Enterprising Investor is concerned with the level of debt relative to the net current assets along with the lack of dividends. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.20 in 2010 to an estimated $3.64 for 2014. This level of growth supports the market’s implied estimate of 10.46% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.
Be sure to check out previous ModernGraham valuations of Gilead Sciences Inc. (GILD) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Gilead Sciences Inc. (GILD)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Gilead Sciences Inc. (GILD) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.