Gilead: Low PEG, High Profits

05/26/2015 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Our latest featured recommendation discovers, develops, and commercializes innovative medicines in areas of unmet medical need, with a focus on HIV/AIDS, liver disease, and serious cardiovascular/metabolic and respiratory conditions, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Gilead Sciences (GILD) was founded in 1987 and is headquartered in Foster City, California. The firm's Sovaldi, for the treatment of hepatitis C, became one of 2014’s biggest selling drugs in the world.

In October 2014, the FDA approved Harvoni,which offers slight improvements to Sovaldiin treating the hepatitis C virus.

In March, Gilead received approval in Japan for Sovaldi, which could be a huge win for the company because more than one million people suffer from the hepatitis C virus.

In addition, Gilead has developed another important drug, called Zydelig, aimed at treating certain types of leukemia and lymphoma.

The recent approval of Zydeligby the FDA will provide Gilead with an additional exciting new drug to add to its growing portfolio of successful products.

Gilead Sciences has many more drugs in various stages of development, which will bolster sales and earnings for many years to come.

The furor over the high costs of Sovaldiand Harvonicontinues; this has forced Gilead to lower its prices in the US and other countries.

However, in my opinion, the effects from the lower prices will be moderate and the company’s other new drugs will easily offset the adverse effects.

GILD sells at 12.1 times current EPS. Gilead initiated a quarterly dividend of $0.43, which provides a 1.6% yield. Cash flow is $16.5 billion per year and the balance sheet is strong with only $13.3 billion of total debt.

The PEG ratio is 0.51, which is extremely low. I expect GILD to reach my minimum sell price target of $137.21 within one year. Shares are clearly undervalued. Buy at the current price.

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