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Old 03-19-2017, 04:14 AM   #1
starssavior
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Gilead Sciences Inc. Vs. Other Drug Companies

I've been frustrated by the valuation of Gilead. The company practically prints money and the market is giving it a 7x multiple. My frustration has been going on for months. Analysts keep saying that Gilead needs to "make an acquisition". Commentators love to call it a "value trap" on CNBC. What's a "value trap" according to these people and Wall Street? A value trap is a company that makes a lot of money but that is not "growing" fast enough.
Investors are being encouraged to look for growth as the main indicator of company value. It doesn't matter what type of growth. I maybe could understand if the market were looking for growth in PROFITS. But that is not the case. They just want growth. If you own a public company the quickest way to a lofty (over) valuation is to grow revenue. In the real world there are many examples of out of control growth being a bad thing. Weeds, viruses, tumors, and cancer are all examples.

In 2016 Gilead had revenue of 30.39 billion. Net income was 13.5 billion. The stock was down 26.04 percent in 2016.
In 2015 Gilead had revenue of 32.6 billion. Net income was 18.1 billion.
In 2014 Gilead had revenue of 24.9 billion. Net income was 12.1 billion.
2013 Revenue $11,202(m) EPS 1.81

Gilead is currently valued at the same market cap that it had in 2013 even though it currently has almost triple the revenue. In 2016 Gilead repurchased 11 billion dollars worth of stock (123 million shares) as well. But the real number that tells the tale is earnings per share. In 2013 Gilead had EPS of 1.81. In 2016 Gilead had EPS of 9.94! You read that right. So triple the revenue and 5.5x the earnings for the exact same price per share. Does that make any sense?

The company has 32.6 billion dollars in cash and investments on its balance sheet. That's far too risky for investors. Who wants to own a company with a third of its market cap in cash? Who are the bums that run this company? Why don't they just buy something? Can people that increase earnings per share 76 percent per year really be trusted with investor money? They must have a shady past.

In January of 1992 Gilead Sciences Inc.(NASDAQ:GILD) went public on the Nasdaq. Since its initial public offering of 5.75 million shares in which it raised $86.25 million, Gilead has grown to a market cap of approx 100 billion as of 2016.

Investors that kept the faith from the IPO have been richly rewarded. A $10,000 investment made in 1992 would be worth more than 2.6 million dollars today, an approximately 26% compounded annual return.
Despite having the second highest net profit of any drug company in the world, the market has rewarded the company with a price-to-earnings multiple of just 7.07x earnings in a sector with an average p/e multiple of 23.87x earnings

Gilead 13.5 billion net profit compared to other companies:

Merck: Revenue: 39.5 billion Net Profit: 10.5 billion Market Cap: 174.03 billion EPS: 1.41
Pfizer: Revenue: 52.8 billion Net Profit: 7.2 billion Market Cap: 204 billion EPS: 1.17
Johnson and Johnson: Revenue: 71.89 billion Net Profit: 16.5 billion Market Cap: 347.85 billion EPS: 5.93

In 2015 Gilead was the most profitable drug company in the world. And in 2016 it was the second most profitable drug company in the world only to J and J.

Johnson and Johnson has been around since 1886 and has 126,000 employees. It should be impossible for a company started in 1992 to out earn the largest drug company in the world in the same sector and to do it with only 9,000 employees.

The market is pricing Gilead as if it will never invest its cash in anything. It's pricing the company as if it's never made any smart decisions. It's ignoring compounded annual returns that are higher than Warren Buffet has achieved. It's ignoring massive share repurchases and increases in EPS. All because revenue decreased between 2015 and 2016. From a gigantic windfall type number to a somewhat gigantic number. It's not like that cash disappeared. Management didn't spend the money on hookers and blow. No they keep adapting and expanding their markets.

The company is nimble, entrepreneurial, and savvy. Management has even stated that they are willing to do hostile takeovers. They aren't trying to overpay for companies. As an investor would you rather have the company buy 3 billion in earnings for 80 billion or 10 billion? The market doesn't seem to care as long the number is higher. That's just stupid. Gilead is worth 180 billion market cap.
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Old 03-19-2017, 05:34 AM   #2
donfairplay
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

This sounds like a puff piece from a hedge fund that doesn't like its position being down 15% from when you last posted about GILD, and can't quite explain how "the market" is wrong (implying that you are right).

also, lol, no GILD is not worth twice what it is valued at now (plus you didn't give a time frame on that considering how wrong you were last time)
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Old 03-19-2017, 07:48 AM   #3
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

Quote:
Originally Posted by donfairplay View Post
This sounds like a puff piece from a hedge fund that doesn't like its position being down 15% from when you last posted about GILD, and can't quite explain how "the market" is wrong (implying that you are right).

also, lol, no GILD is not worth twice what it is valued at now (plus you didn't give a time frame on that considering how wrong you were last time)
The market cap today is the same as it was in 2013. Yet it has retained earnings from 2014,2015, and 2016 that it did not have in 2013. That is the reason it is able to have 32.6 billion dollars in cash and investments on its balance sheet right now. It is also the reason it was able to purchase 123 million shares of its stock back in 2016(11 billion dollars spent). Its revenue today is 3x what it was in 2013. And its earnings per share are 5.5x times what they were in 2013.

No one can say the price of anything is "wrong" in an absolute sense. If you have not eaten in awhile a meal might be more valuable to you than a house. But given normal conditions a house is interpreted by most people to be more valuable than a meal.

Johnson and Johnson is worth 350 billion and Gilead is worth 90 billion. In 2016 Gilead earned 13.5 billion and Johnson and Johnson earned 16.5 billion. So for an extra 3 billion in earnings the market is willing to pay 260 billion more for Johnson and Johnson. The market says it wants growth companies but ignores that Gilead only has 9000 employees. Johnson and Johnson has to pay 126,000 people before shareholder's get theirs. Gilead has proven that it is more efficient at earning money than the large drug companies both on a basis of talent and on a cost basis. What I mean is that for every dollar in revenue that Gilead earns shareholders earn much more than they would if the Johnson and Johnson earned that same dollar. Gilead has better margins and a much lower cost structure. They are going to invest that 32.6 billion more intelligently than other companies invest their earnings. History has proven that. And eventually "the market" will figure it out. By then the stock will be 220 dollars a share and valued correctly. That's when CNBC will encourage the public to buy. Always a day late and a dollar short.
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Old 03-19-2017, 01:34 PM   #4
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

Gilead has the same valuation as 2013, why? In 2013 they had a lot of drugs working out well and stuff in the pipeline, now they don't. You don't value drug companies based on past earnings, you look at what they have in their pipeline.
People want an acquisition because their revenue is about to decline a lot and then they won't be valued at 7x earnings
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Old 03-19-2017, 02:54 PM   #5
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

haven't looked at them for years. but my first guess is the same as bigt2k4s. most likely their pipeline sucks or patents are running out. you should look at that.
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Old 03-19-2017, 03:16 PM   #6
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

Quote:
Originally Posted by bigt2k4 View Post
Gilead has the same valuation as 2013, why? In 2013 they had a lot of drugs working out well and stuff in the pipeline, now they don't. You don't value drug companies based on past earnings, you look at what they have in their pipeline.
People want an acquisition because their revenue is about to decline a lot and then they won't be valued at 7x earnings
Gilead has 26 drugs in various stages of clinical trials today. I was valuing the company without even considering their pipeline. You don't value a company based on how much cash it has? In 2013 the company had 50 billion dollars less in net earnings because it earned 50 billion dollars in 2014,2015, and 2016. Its revenue is triple what it was in 2013. And it's earnings per share because of buybacks and increases in revenue are 5.5x what they were in 2013. With acquisitions, the pipeline has actually increased.

While it is true that HCV revenue is projected to decrease, HIV revenue is increasing. I also believe that management is being conservative in its projections of HCV revenue. It's important to remember that they have the cure for a disease that affects 200 million people worldwide.
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Old 03-19-2017, 03:35 PM   #7
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

there is most likely a reason they don't get the same multiple as other drug companies. since it doesn't seem to be the balance sheet or their past performance it's most likely doubts about their future performance. best place to look is their pipeline and their patents.

if they have 26 drugs in their pipeline:
what are the drugs supposed to cure?
how big is the market?
how are the clinical trials going?
are there competitors?
how are the clinical trials of their competitors going?
how would the drug impact their performance if everything goes right?
how would the drug impact their performance if everything goes wrong?
how probable are those cases?

patents:
how long do the patents on their drugs last?
are competing (better?) drugs hitting the market or in clinical trial?


stuff like that
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Old 03-19-2017, 03:54 PM   #8
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

In 2013 Gilead didn't pay a dividend. It didn't start paying dividends until the second quarter of 2015. Today, because it earns 9.96 per share, it is able to pay an annualized dividend of $2.08 per share. An amount which is more than 100 percent of what the company earned per share in 2013(1.81EPS total), just in dividends! That is the power of share buybacks and increases in net profit and revenue. For the same price I can buy a share with both statistically and materially better financial characteristics.
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Old 03-19-2017, 05:32 PM   #9
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

Quote:
Originally Posted by BooLoo View Post
there is most likely a reason they don't get the same multiple as other drug companies. since it doesn't seem to be the balance sheet or their past performance it's most likely doubts about their future performance. best place to look is their pipeline and their patents.

if they have 26 drugs in their pipeline:
what are the drugs supposed to cure?
how big is the market?
how are the clinical trials going?
are there competitors?
how are the clinical trials of their competitors going?
how would the drug impact their performance if everything goes right?
how would the drug impact their performance if everything goes wrong?
how probable are those cases?

patents:
how long do the patents on their drugs last?
are competing (better?) drugs hitting the market or in clinical trial?


stuff like that
From a valuation stand point all drug companies face the same problems with drug candidates in their pipelines. The real question that should be asked is which companies are the best at monetizing approved drugs? Is Gilead good at monetizing approved drugs? Yes, they bought Pharmassat for 11 billion and will earn over 100 billion in cash from that investment.

To monetize HCV the company has had to develop the skill to navigate complicated drug approval processes on a worldwide level. Expertise of regulatory processes, political and business contacts, and market pricing knowledge can't help but to increase the speed, confidence, and ultimate success of future product monetization.
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Old 03-20-2017, 12:07 AM   #10
BooLoo
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

stop pumping if you don't want to do the work. everything you've said here is what's in their reports and their balance sheet. everybody who manages money in the market can compile that data in half an hour. either all those people are dumb and you've found the value investment of a century in a 90b company (highly unlikely) or there is another story you are either not seeing or not talking about.
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Old 03-20-2017, 12:32 AM   #11
Clayton
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Re: Gilead Sciences Inc. Vs. Other Drug Companies

rename thread "Gilead is going to the moon and if you claim otherwise I will fight you"
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