Why Gilead’s Valuation Is Low Compared to Peers
Investors consider two valuation multiples, forward PE (or price to earnings) and EV-to-EBITDA multiples, to value a company with relatively stable earnings. As of February 28, 2017, Gilead (GILD) was trading at a forward PE (price-to-earnings) multiple of ~8.7x compared with the industry average of 13.2x.
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The fundamental factors affecting stock prices and valuation include the performance of growth platforms as well as the exclusivity of blockbuster drugs. Furthermore, foreign exchange rates play an important role in the profitability of the company and consequently affect the stock prices and valuation.
PE multiples represent what one share can buy for an equity investor. Over the last year, the company’s forward PE has been in the range of 6.4x to 9.5x. The company is trading at a lower PE than Celgene (CELG), Biogen (BIIB), and Amgen (AMGN), which trade at a forward PE of 16.3x, 13.7x, and 14.1x, respectively. As discussed above, Gilead trades at a much lower forward PE as compared to the industry average.
Forward EV to EBITDA
On a capital-structure-neutral and excess-cash-adjusted basis, Gilead currently trades at ~3.9x, which is lower than the industry average of ~9.8x. Competitors Celgene, Biogen, and Amgen have forward EV-to-EBITDA multiples of 12.4x, 9.9x, and 8.9x, respectively.
According to data from February 28, 2017, Gilead’s stock price has fallen ~19.9% over the last 12 months. Wall Street analysts estimate that the stock has the potential to return ~15.7% over the next 12 months. Analysts’ recommendations show a 12-month targeted price of $81.58 per share compared to the last price of $70.50 per share as of February 27, 2017. Also, out of 29 analysts that cover Gilead Sciences, ~55% of the analysts recommend a “buy,” and ~45% of analysts recommend a “hold.” Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.
To divest risk, investors can consider ETFs like the iShares NASDAQ Biotech ETF (IBB), which holds ~6.9% of its total assets in Gilead Sciences, 7.1% in Biogen, 8.9% in Amgen, and 7.6% in Celgene.