A Chance to Invest in a High-Growth Biotech
This week’s hot stock belongs to an industry that we usually like to avoid: The always-volatile biotechnology sector. Biotech companies tend to be speculative plays, bets on whether or not the company’s research team will be able create a product or discovery of value. However, there are a few companies in this industry that have been increasingly profitable year in and year out, and these biotechs offer good opportunities for value investors. This week’s hot stock pick is one such company: Gilead Sciences (GILD).
Gilead is a biopharmaceutical company with leading drugs and research in the areas of HIV/AIDS, Hepatitis C, liver disease, oncology, and cardiac and respiratory diseases. Gilead has grown after tax profit (NOPAT) by 44% compounded annually since 2003. The company currently has a 45% return on invested capital (ROIC), nearly $7.7 billion in free cash flow on a trailing 12 month basis, and positive economic earnings for the past 10 years.
At the end of the third quarter of 2014, Gilead reported quarterly revenue of over $6 billion, up over 117% year over year. The reason for this dramatic increase is the approval and sale of Gilead’s Hepatitis C treatments Sovaldi and Harvoni. The stock price of Gilead has fallen over the last few weeks on the back of competition from cheaper drugs made by rival AbbVie (ABBV). This decline in stock price creates a good entry point as Gilead has proven its ability to face competition and continuing to improve its offerings.
By looking at the above facts and figures, its easy to see why Gilead earns our Attractive rating. Best of all is the fact that Gilead is trading at a discount to its usual valuation. At its current price of ~$106/share, Gilead has a price to economic book value (PEBV) ratio of 1.4, which implies that the company will grow NOPAT by 40% from current levels. This valuation is slightly higher than we usually like to see in our most attractive companies, but remember that Gilead has been able to grow profits by 44% compounded annually for the past 10 years. Given Gilead’s long history of getting its drugs approved and on the market, we think that investors should take advantage of this relative discount.
If Gilead can grow NOPAT by 23% compounded annually for the next 10 years (almost half of its historical growth rate), the stock is worth $172/share, a 62% upside.
André Rouillard contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
Photo credit: United Soybean Board
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