Tuesday, May 3, 2016

Recent Buy - GILD



Based on my portfolio, I need to increase the holdings in my Heath Care sector. I have been eyeing ABT, PFE and GILD over the last couple of months. PFE is now out of reach, but ABT and GILD are buying opportunities - especially with the negative earning report reviews.

On 4/29, I added a new position with GILD.

Date
Transaction
Ticker
Price
Quantity
Amount
Divs/Year
Est. For Dividend
4/29/2016
Buy
GILD
88.07
17.00
1497.19
1.72
$29.24




Total
$1,497.19
Total
$29.24

You can read more about GILD here: http://www.wikinvest.com/stock/Gilead_Sciences_(GILD)

Biopharmaceutical companies business models are ‘simple’ (note) to understand. They make drugs, and then markets them. The key is the types of drugs they manufacture. The industry is very competitive and highly regulated. The key is to go with companies with strong moats - nice range of drugs and patents on them. Eventually, they will have generics to deal with, so constant R&D is a must.

Note: It is never easy to fully understand businesses…. but I tell my son that they sell drugs! (See http://div4son.blogspot.com/2015/12/kiss-principle-for-investing.html)

My Criteria Table



GILD 5/2016
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
No
Less than 5 years
ROE/Op Margin
Stable
Yes
Stable
Long term Avg Growth
Stable
Yes
Stable
FCF over Dividends
Yes
Yes
FCF covers Dividends
M* Moat
Wide Moat
Yes
Wide
M* & S&P
Credit Rating
> BBB+
Yes
A+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes, but Debt to Equity high
Cash to Debt
Interest Coverage 32.26
Debt to Equity 116.02
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 5 Stars
Payout Ratio
<60%
Yes
11%
Dividend Growth
& Yield
Dividend Yield
>3%
No
1.93%
Dividend Growth
>5%
No
Less than 5 years
Chowder
>12%
No
Less than 5 years
Valuation
Yield/Avg Yield
>1.1
No
Less than 5 years
Dividend Yield Theory Mid Point
Below Mid Point
No
Less than 5 years
P/E
Below Mid Point
Yes
Median 11.90 Current 7.47 Forward 7.19
DRRM
~10%
Yes
Assuming 3% growth; projected return=13.64%
M* Estimate
<M* est
Yes
M* 124
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 155


Based on my criteria table. There are a lot of risks. (Lots of NOs!!!) The <5 years dividend growth, high debt compared to previous years, low yields etc are things that make it think twice (maybe three times) before buying.

Tools used below - http://div4son.blogspot.com/2016/01/d4s-valuation-tool.html

EPS Trend

There is a nice correlation between the EPS and the share price. As long a GILD continues to deliver on the earnings, I can expect the price to increase over time (where Time>10 years).


DDRM

More important is the return in investment and dividend growth. Based on the DDRM, I see a healthy 13+% dividend growth.

DDRM

Dividend Rate ($)
1.72
Divided by: share price
89
Current yield (%)
1.93%
Core Growth Estimate (%)
3.00
Divided by: ROE (%)
48.5
Multiplied by: EPS ($)
11.91
Cost of Growth (%)
0.74
Earnings per Share ($)
11.91
Minus: Dividend
1.72
Minus: Cost of Growth
0.74
Funding Gap ($)
9.45
Divided by: Share Price ($)
89
Share Change (%)
10.62
Core Growth (%)
3.00
Plus: Share Change (%)
10.62
Total Dividend Growth (%)
13.62
Plus: Dividend Yield (%)
1.93%
Projected Total Return (%)
13.64


Dividend Rate ($)
1.72
Required Return (%)
15.62
Growth (%)
13.62
Price
86.07


I use DDRM to estimate the price as well. Unfortunately, the yield history is less than 5 years, but based on my PE analysis, it is also trading a relatively low P/E.  


High P/E
11.90
Mid P/E
9.62
Low P/E
7.34


High Price
141.73
Mid Price
114.57
Low Price
87.42


P/E 5 Yr High
41.06
P/E 5 Yr Low
7.34


P/E 5 Yr Median
11.90


Current P/E
7.47


2016 P/E Est
7.19


So, my estimate for the price is around 90-110. I think if it is below 90, then we are in the buying range. With the recent earnings report, and the general bad news around biopharm companies, I see more volatility ahead. I do anticipate the price to go down further. Therefore, my initial position is relatively small to start.
When the price dips further I look forward to add more to more position. There are risks with this company, but GILD seems to have a good range of drugs under their control, and hence a relatively wide moat in this tough competitive space.

Anyway, I look forward to adding more heathcare companies. I think ABT is trading near its lows also. I will make another decision soon.

What do you think of GILD?

D4s

Disclosure: Long GILD, ABT

6 comments:

  1. Congrats on the buy, as an Australian, it's not a company I know too much about. Are you concerned that a competitor could come along and produce a much better / cheaper alternative to what GILD has and therefore make all their current drugs almost worthless?

    Tristan

    ReplyDelete
    Replies
    1. Tristan,
      Normally, these companies protect themselves by using patents. There is a problem when the patent expires. Then, the generics take over. So, they need constant R&D.
      You are right though with the competition. I look for companies with wide moat. (Morningstar indicator, High ROIC/ROE/Oper margins compared with competitors.
      So, a lot of reading prior to pulling the trigger. Hopefully, my assessment is okay - but we are constantly dealing with imperfect information.
      D4s

      Delete
  2. Nice to have you as a shareholder D4S. I like the healthcare space and like GILD. Let's get some more at a better price and expect them to turn things around. I'm sure they will. Take care bud.

    ReplyDelete
    Replies
    1. You know what they say about great minds think alike. :)
      I'm definitely will buy more if the price dips. Its just a matter of when.
      D4s

      Delete
  3. One of my favorite stocks. It's been unfairly beat down, but long-term prospects for GILD are good. I've been taking advantage of the stock price dips and selling covered calls. I making a killing :-).

    ReplyDelete
    Replies
    1. I definitely like the growth potentials of GILD. I think the price can drop further so I plan to buy more when it gets close to 80. I'm glad your options strategies are working well.
      D4s

      Delete