Why Overvalued Gilead May Fall 10%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Gilead Sciences Inc. (GILD) shares have rallied by nearly 13 percent so far in 2018, but the outlook for the company may not be as rosy as some suggest. The stock currently trades at 12.2 times one-year forward earnings – its highest levels since July of 2015. This makes it hard to swallow that the stock could rise another 17 percent all the way to $95, as some suggest. (See more: Why Gilead Can Beat Both the Biotechs and the S&P.)

Based on a comparison with biotech peer Biogen Inc. (BIIB), and pharmaceutical peer Merck & Co. Inc. (MRK) – both of which have top and bottom line growth – one has to wonder why Gilead isn't currently overvalued.

Analysts appear cautiously optimistic about Gilead, with only 58 percent rating the stock a buy or outperform. Those same analysts have all been slashing Gilead's earnings estimates, putting the stock's valuation at its highest since 2015, making the stock appear overvalued.  

Should shares trade at a valuation between Biogen and Merck –  around 11 times 2019 earnings estimates of $6.62 –  Gilead would be valued at only $72, a decline of roughly 10 percent. 

Valuations Headed In Opposite Directions

Gilead's forward earnings multiple has been expanding, while Biogen's and Merck's have been falling. Gilead's one-year forward PE multiple is at its highest level since 2015, while Biogen and Merck's are at their lowest since 2016. (See also: Differences Between Forward P/E And Trailing P/E.)

Fundamental Chart data by YCharts

Gilead's Suspect Growth

Biogen currently trades at 10.8 times 2019 earnings estimates of $26.19 per share, growing by 5.5 percent over 2018 forecast, while revenue is expected to rise by 3 percent to $13.37 billion. 

Merck currently trades for 12.6 times 2019 earnings estimates of $4.40 per share, and that comes on growth of 5.7 percent, while revenue is expected to climb by roughly 2 percent.  Analysts have been raising their outlooks for Merck and Biogen since the start of 2018.

GILD EPS Estimates for Current Fiscal Year data by YCharts

Gilead, on the other hand, is forecast to see earnings climb by 2.5 percent in 2019 on revenue that is expected to fall by nearly 1 percent. To make matters worse, analysts have been slashing Gilead's earnings estimates for 2018, 2019, and 2020 since the start of the year, making Gilead's earnings growth appear suspect.  

GILD Annual Revenue Estimates data by YCharts

Analysts Appear Lukewarm

The average analyst price target on Gilead is about $88.70, upside of about 9.8 percent from its closing price of roughly $81.10 on March 8, according to data from YCharts.  Meanwhile, only 58 percent of analysts rate the stock a buy or outperform, while 42 percent rate the stock a hold. That's not an overwhelmingly bullish endorsement for Gilead's outlook. 

GILD Buy Recommendations data by YCharts

For now, Gilead shares trade at depressed enough levels that some may be willing to bet they rise. But based on the current growth outlook, that's definitely not a sure bet.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.