small_width400_Gilead-StockGo-Long-On-Gilead-Sciences-Inc.-GILD-Without-Being-Fearful.jpg (400×225)

Flickr

Gilead Sciences (NSDQ:GILD) is currently trading at an earnings multiple of 6.66 and a share price of $75.83. Compared to competitors such as Celgene (NSDQ:CELG) and Amgen (NSDQ:AMGN), Gilead looks really cheap from a valuation perspective. But is it really? I have been vocal in my bullish opinion about this stock for some time now. In fact, I believed the stock will not stay under $80 for long and I still maintain that point of view despite the share price dropping a further for a short spell since I made that call. The company announces its third quarter earnings on the 1st of November where the expected earnings per share are $2.85 on revenues of $7.5 billion. Both figures are approximately 10% lower than last year’s numbers which is why the market is punishing the stock at present. So should you go long on the stock?

Strong Competitive Advantage

Gilead attracts me because of its strong competitive advantages, which is why I see far more upside potential than downside risk at this stage. Yes, the company has had a poor 2016 but even with its HCV woes, Gilead will still bring in about $30.5 billion this year in top line revenue, which will only be slightly over $2 billion short of the company’s top line last year ($32.63 billion). Does a $2 billion reduction in top line warrant a share price collapse of 33%+? (see chart).

oct24-07_1.jpg (640×359)

This is another factor many bearish analysts are missing. The chart above illustrates that the biotech ETF (NASDAQ:IBB) lost 27% since it formed its top in the summer of 2015. Gilead’s share price definitely got caught up in this.

However, sometimes the market can get too hung up on short term trends. Yes, analysts have 2017 revenue projections of $29.23 billion coming in slightly lower than 2016 but we are not talking about a huge difference here (just over $1 billion). In fact, if Gilead’s Epclusa in the HCV space can prove a bit hit in the quarters to come, these future top line projections could be on the lower end by quite a sizable margin.

Print Friendly, PDF & Email