Gilead Sciences Has Upside Potential in the Short-Term Due to Widespread Use of Vekury (remdesivir) to Treat Hospitalized COVID-19 Patients
Stocks are cheap, but the growth outlook for 3-5 years is pretty bad
Wall Street's Consensus Outlook Is Bullish
The market implied outlook (calculated from option prices) is slightly bearish for 2022
Gilead Sciences (NASDAQ:) reported strong Oct. 28, beating consensus expectations by more than 50% (Source: E-Trade). Veklury (remdesivir) revenues, used to treat hospitalized COVID-19 patients, delivered a major boost for the third quarter, with sales up 120% year over year and contributing more than 25% (see slide 7) of the company's total turnover.
GILD has a YTD total return of 24.24%, almost identical to the total return of the same period. The stock is currently about 3.5% lower than the YTD high closing price of $73.03 on Aug. 17.
GILD 12-month price history longer-term performance has been disappointing, with 3-year total returns less than half that of the drug-maker industry as a whole (as defined by Morningstar). The 5-year performance is even worse, with an annualized total return of 2.55% for GILD versus 11.56% for the industry. This underperformance is the result of poor performance from a number of products in the development pipeline during this period.
GILD Trailing Total Returns vs. The Drug Manufacturer Industry And The US Equity Market
Source: Morningstar
With a current dividend yield of 4.04% and 5-year dividend growth of 9.3% per annum, GILD may be of interest to income-oriented investors. GILD started paying dividends in 2015, so the company doesn't have a long track record to establish management commitment. With a P/E of 12, the stock looks cheap relative to current earnings. The P/E is so low because of concerns about future earnings growth. The consensus on 3 to 5 year expected EPS growth for GILD is essentially nil (-0.17% pa). Analyzing a pharmaceutical company's drug pipeline and forecasting revenue is a complex problem. Rather than attempting a bottom-up analysis, I rely on two forms of consensus view for GILD. The first is the well-known Wall Street analyst consensus assessment and the 12-month price target. The second is the market implied outlook, which is a probabilistic price return outlook that represents the consensus view of buyers and sellers of options. In short, the price of an option on a stock reflects that market's estimate of the probability that the price will rise (call option) or fall (put option) relative to a certain level (the option's strike price). By analyzing the prices of call and put options on a series of strikes, all with the same expiration date, it is possible to calculate a probability distribution of price returns that reconciles all option prices. GILD on March 11, 2021, about 9 months ago. At the time, Wall Street's consensus outlook was bullish and the market-implied outlook somewhat bearish. GILD's low rating was a plus, but the mismatch between the analysts and the options market meant I was given a generally neutral rating. Since that post, GILD's total return is 14.74%, compared to 20.14% for the S&P 500.
I've calculated updated market implied outlook for GILD through mid-2022 and early 2023. am my review from GILD reviewing based on this outlook and Wall Street's consensus outlook for 2022. aggregating the views of 16 ranked analysts who have published ratings and price targets for GILD in the past 90 days. The consensus rating is bullish and the 12-month consensus price target is 9.92% above the current share price. Of the 16 analysts, 10 give GILD a buy recommendation and 6 a hold recommendation. In March, the consensus price target for 12 months calculated by E-Trade was $75, which was 17.7% higher than the stock. price at that time. Gains in GILD have reduced the expected increase for the next year. In other words, the share price has risen faster than the consensus price target.
GILD analyst consensus rating and 12-month price target
Source: E-Trade
Investing. com's version of the Wall Street consensus outlook was calculated based on the opinion of 30 analysts. The consensus rating is bullish. There are more analysts who assign a neutral than a bullish rating, but only one analyst gives GILD a sell rating. The 12 month price target is 8.53% above the current price. the consensus outlook for GILD was bullish in march and remains bullish. The 12-month consensus price target is about 9.2% above the current share price (average of E-Trade and Investing.com values). In combination with the 4.04% dividend, the expected return over 12 months is 13.24%. This value is in the range of the total annualized return over 10 and 15 years, but is well above the return over 3-5 years. Assigning a single target value for the price in 12 months assigns the options market opportunities to the range of possible future prices. This probabilistic outlook reflects the market's assessment of the uncertainties associated with GILD's performance in the coming year. I calculated the market implied outlook to mid-2022 by analyzing the prices of call and put options expiring on June 17, 2022. I also calculated the market-implied outlook to 2022 by analyzing options expiring on January 20. , 2023.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
GILD Market -Implicit price return probabilities from now to June 17, 2022
Source: Author's calculations using options quotes from E-Trade
The market implied outlook for GILD through mid-2022 is generally symmetric, with similar probabilities on positive and negative returns of the same magnitude. The peak probabilities have been tilted slightly to favor negative price returns. The maximum probability corresponds to a price return of -5.5% and the median price return is -2%. The annualized volatility calculated from this distribution is 28%, which is not particularly high or low for an individual stock. To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative returns side. of the distribution along the vertical axis (see graph below). . The negative return side of the distribution is rotated about the vertical axis. With this view, the increased probability of negative returns versus positive returns is more apparent (the red dotted line is on or above the solid blue
Theory suggests that the market-implicit outlook tends to have a negative bias as investors generally tend to be risk averse and thus willing to pay more than fair value for downside protection (put options).There is no robust way to estimate this bias, but from a neutral outlook for a stock is expected to show a slightly elevated probability of negative returns as we see here I interpret the market-implied outlook for GILD for the next 6 months as neutral with perhaps a slight bearish tilt. clearly in favor of price declines There is a more defined peak in probability and this corresponds to a price return of -7.4% over the next 13.25 months. There is also a wider spread between the chances of negative returns and positive returns. This is a slightly bearish market implied outlook for GILD through 2022. The expected annualized volatility calculated from this breakdown is 27%.
Source: Author's calculations using options quotes from E-Trade. The negative return side of the distribution is rotated about the vertical axis.
The market implied outlook for GILD is neutral through mid-2022, turning slightly bearish for the full year. Expected volatility for the 6 and 13 month outlook is approximately 27%.
Summary
Gilead reported strong third quarter results, largely due to the sale of Veklury (remdesivir). If there are ongoing spikes in COVID-19, this revenue increase is likely to continue. To grow revenues in the longer term, the company must move new drugs through the development pipeline and bring them to market. Given the historical challenges, the outlook is mixed. The poor 3-5 year consensus outlook for GILD reflects a lack of confidence in the company's ability to perform effectively. As a rule of thumb for a buy recommendation, I want to see an expected total return that is at least half of the expected year-over-year volatility.
GILD is just below this threshold, using the expected volatility of the market-implied outlook. The market implied outlook for GILD is neutral through mid-2022, but slightly bearish for the 13.25 month period to January 20, 2022. With the analysts' bullish view and the bearish view for 2022 of the market implied outlook, I maintain my neutral assessment on GILD.
