2024-01-04 10:57:01 ET
Summary
- Gilead Sciences is recovering from reduced Veklury (remdesivir) revenue following the height of the COVID-19 pandemic.
- The company, however, is making progress in HIV product sales and oncology, the latter it expects to make up one-third of its business by 2030.
- Gilead's strong free cash flow generation easily covers its dividend payment, and we find its ~3.6% dividend yield quite attractive. Gilead's dividend growth potential is phenomenal, in our view.
- Shares trade at an attractive low double-digit forward P/E ratio, and we think they deserve a much higher multiple.
By Valuentum Analysts
Gilead Sciences (GILD) used to be a stock market darling. The firm's drug Sovaldi and its successor Harvoni, a once-daily oral treatment of hepatitis C [HCV] infection, were at one time its key product drivers and accounted for a large percentage of its product sales, but high cure rates and an increasingly crowded HCV market have materially cut its revenue from those products. Gilead is now adapting nicely to new opportunities, and we think it offers investors a nice combination of considerable dividend growth potential at a very reasonable valuation.
We last wrote about Gilead in February 2020 in this article , and shares have advanced to over $80 from just under $70 previously. In this note, we'd like to update readers on why we think shares are underpriced and walk through its most recent earnings report. We think Gilead is well on the road to future growth, especially in its oncology business, and the company's dividend yield of ~3.6% pays investors to wait for its promising pipeline to flourish. On a discounted cash-flow [DCF] basis, we value Gilead north of $100 per share, far above where it is currently trading at the time of this writing (~$83 per share).
Latest Earnings Results
Gilead Sciences reported better-than-expected third-quarter results on November 7 with sales and non-GAAP earnings per share exceeding the consensus estimates. Having cured hepatitis C and truncated its future sales in this area, Gilead has been forced to reinvent itself, and it continues to make solid progress in HIV product sales and oncology. Sales of the HIV/AIDS drug Biktarvy advanced 12% in its third quarter thanks to higher demand, while sales in its overall oncology business leaped an impressive 33%.
Gilead continues to work through the weakness of COVID-19 medication Veklury (remdesivir) with the pandemic now largely behind the world, but total product sales, excluding Veklury, advanced 5% in the third quarter compared to the year-ago period. What excites us the most about Gilead is its expectations for oncology to represent as much as one-third of Gilead product revenue by 2030. As witnessed through the strength in Cell Therapy and Trodelvy in recent quarters, the company's promise in this area is evident, as shown below.
Gilead's potential in oncology speaks to long-term sustainability. (Gilead)
Here is what CEO Daniel O'Day had to say about Gilead's third quarter in the press release :
Gilead has now delivered two years of consistent growth in our base business. In the third quarter, this continued growth was driven by both Virology and Oncology. Our clinical momentum also remains strong, and highlights this quarter included new data on Trodelvy with pembrolizumab in first-line metastatic non-small cell lung cancer. In Virology, we completed enrollment for Phase 3 trials of lenacapavir for HIV prevention and oral obeldesivir for COVID-19. We are looking forward to advancing these and other potential new options for patients over the coming months.
Through the first nine months of 2023 ended September 30, Gilead generated $5.8 billion in operating cash flow and spent $370 million in capital expenditures, translating into strong free cash flow generation of ~$5.5 billion. Though free cash flow faced some pressure from the same period last year, Gilead's free cash flow generation remains robust, supporting our $100+ fair value estimate. The company ended the third quarter with ~$5.7 billion in cash and ~$1.2 billion in marketable securities, versus short-term debt of ~$1.8 billion and long-term debt of ~$23.2 billion. It does hold a rather large net debt position, but we view its leverage as manageable.
Valuation
Gilead's shares trade at a low double-digit multiple, much lower than that of the market. (Seeking Alpha)
At face value, Gilead's shares look cheap, trading at a low double-digit forward P/E multiple, and while companies with below-market multiples are often working through some major issues, we don't think such a low valuation multiple is warranted in Gilead's case. For starters, Gilead is doing a good job replacing lost revenue from Veklury, and it has a line of sight to drive considerable growth in its oncology business in coming years.
Second, Gilead is no slouch when it comes to generating tremendous levels of free cash flow, easily covering its dividend payout. Many companies with low P/E ratios are often paying out nearly all of their free cash flow as dividends, where a dividend cut may be likely. As noted above, Gilead's free cash flow during the first nine months of 2023 came in at ~$5.5 billion, while cash dividends paid were less than $2.9 billion, good for significant coverage.
From where we stand, Gilead deserves a re-rating of its equity. Strong long-term growth prospects in oncology and solid free cash flow generation at present should at least warrant a multiple closer to that of the market. Our discounted cash-flow derived fair value estimate suggests a value north of $100 is more appropriate for such a strong free cash flow generator, and that may be considered conservative.
Our valuation break down of Gilead Sciences. (Valuentum)
Gilead's Dividend Health
Gilead's dividend is well-supported by free cash flow generation. (Valuentum)
Now, let's look at Gilead's dividend. We like to evaluate a company's dividend health via its traditional free cash flow strength on a forward-looking basis. We also take into consideration a firm's net balance sheet position, where we view firms that hold a net cash position more positively than firms with a net debt load.
Though Gilead has a net debt position, our expectations of Gilead's free cash flow generation over the next five years well cover not only its net debt position on the balance sheet, but also future expectations of cash dividends paid over this time period. We think Gilead has tremendous capacity to keep raising its dividend in coming years, further bolstering its position as an attractive dividend growth and potential income candidate.
Gilead has a lot of room to keep raising its payout, in our view. (Valuentum)
Concluding Thoughts
Gilead has been the dominant player in the HCV market for years, but high cure rates have reduced the long-term revenue opportunity in this area. Gilead has become a victim of its own success in HCV, but the company is working hard in the realms of HIV and oncology, with the latter expected to become a material part of its business by the end of this decade. We like Gilead's ~3.6% dividend yield and its strong free cash flow coverage of the payout, which suggests future dividend growth may be readily achievable. Shares also look quite cheap, trading at a low double-digit forward P/E multiple and materially below our $100+ per-share DCF-derived fair value estimate.
For further details see:
Gilead's Dividend Growth Potential Looks Phenomenal