GILD is setting up for a big bullish move

June 27, 2018

GILD is setting up for a big bullish move

At the beginning of May, shares of Gilead Sciences Inc. (GILD) dropped about 10% overnight when the stock posted much lower-than-expected earnings for the first quarter of the year. The stock kept falling as low as nearly $64 before finally finding support. The stock has staged a nice little short-term upward trend since that point, moving almost 10% higher from that point as of this writing. Overall, the stock is down only marginally for the year (about 3% from the beginning of January) but is still far below its high in late January at nearly $89 per share. Given the the stock’s underperformance from the last quarter, is it realistic to expect the stock to rebound and reclaim those highs?

Working against the stock is the reality that sales and earnings have both decreased over the last twelve months as well as the last quarter. Much of the decline for the past year appears to have been tied to lower revenues from hepatitis C (HVC) sales, where prices have been forced lower amid shorter treatment durations along with increased competition. The decline in that segment is somewhat offset by increases in sales for HIV and other antiviral drugs, which are expected continue through 2018. Recently, the European Commission approved GILD’s Biktarvy HIV-1 treatment, opening the door for that drug to be marketed throughout the European Union, a positive that should only boost that segment’s business even further.

It’s true that the Pharmaceutical and Biotechnology industries within the Healthcare sector can be volatile, and GILD’s price movement since the beginning of the year is certainly illustrative of that reality. I believe the key when you’re looking for good investing opportunities in this area of the market is to focus on how broad-based a company’s business is, what their balance sheet actually looks like, and where the stock currently sits relative to previous price action. GILD is one of the largest players in the Biotech industry, with a drug portfolio that spans a pretty wide range of human disease. Other positives include a very strong fundamental base and compelling value proposition. Let’s dive in and see what the numbers reveal.

Fundamental and Value Profile

Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes medicines in areas of unmet medical need. The Company’s portfolio of products and pipeline of investigational drugs includes treatments for Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome (HIV/AIDS), liver diseases, cancer, inflammatory and respiratory diseases and cardiovascular conditions. Its products for HIV/AIDS patients include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Truvada, Emtriva, Tybost and Vitekta. Its products for patients with liver diseases include Vemlidy, Epclusa, Harvoni, Sovaldi, Viread and Hepsera. It offers Zydelig to patients with hematology/oncology diseases. Its products for patients with various cardiovascular diseases include Letairis, Ranexa and Lexiscan. Its products for various inflammation/respiratory diseases include Cayston and Tamiflu. It had operations in more than 30 countries, as of December 31, 2016.GILD has a current market cap of $91.6 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales both declined, with earnings decreasing at a greater rate (nearly 38%) than sales (almost 22%). In the last quarter both areas declined about 14%.
    Free Cash Flow: GILD has very healthy free cash flow of more than $10.5 billion over the last twelve months, although it has declined from a little over $19 billion at the beginning of 2016. On a Free Cash Flow Yield basis, however, it has remained pretty consistent, with this measurement actually increasing somewhat over that period from about 10.8% to 11.5% as of the last quarter.
  • Debt to Equity: the company’s debt to equity ratio is 1.32, which is a little high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have. High debt to equity ratios are also pretty normal for this industry.
  • Dividend: GILD pays an annual dividend of $2.28 per share, which translates to an annual yield of 3.22% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GILD is $15.84 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.42. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Biotechnology industry is 5.4, and the historical average for GILD is 7.74. The stock would have to reach $85 to be at par with the industry average, and $122 to meet its historical average.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s decline and concurrent downward trend from the end of January through the beginning of May. This line also serves to calculate Fibonacci trend retracement levels, which you can see on the right side of the chart. It’s also pretty easy to see the stock’s nice upward rally from its low around $64 over the last month and a half. That rally has also produced a good-looking, upward stair-step pattern that has given the stock the momentum to drive to its current price. The stock is not quite $4 away from its nearest resistance around $74 per share, and in the near-term I would expect that level to provide some resistance to mute the stock’s current rally. If that resistance is broken, the next most likely resistance levels occur at about $77 and $80, respectively, but since the break above $74 would mark a continuation and strengthening of the stock’s upward trend, their resistance could be muted. Beyond $80, there would be little to stop the stock from moving into the $85 to $90 range. The stock is working with strong support in the $69 to $70 range, and a break below this level would likely see the stock move quickly back to its 52-week low around $69.
  • Near-term Keys: Look for the stock to break above $74 per share. A move above this level would be solid confirmation to enter a bullish trade, either by buying the stock or working with call options. A move below $69, on the other hand would be a good opportunity for a bearish short-term trade by either shorting the stock or working with put options.

By Thomas Moore Biotechnology Investiv Daily Share: