Is It Finally Safe to Buy Gilead Sciences Stock? 1 Analyst Thinks So

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Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Gilead Sciences (NASDAQ: GILD) is due to report its fourth-quarter and full-year 2017 earnings in less than two weeks (Tuesday, Feb. 6). It's not certain yet just what Gilead will report, but one analyst is urging investors not to wait for the news. Instead, investors should buy Gilead Sciences now, ahead of earnings.

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Here are three things you need to know.

1. Jefferies upgrades Gilead

Investment banker Jefferies & Co. upgraded Gilead Sciences stock to buy and assigned a $95 price target to the $83 stock this morning, reports StreetInsider.com (requires subscription). Stating the obvious, Jefferies observed that Gilead "has had it tough since 2015" (the stock is down 30% from its July 2015 peak). And yet, Gilead stock is also up nearly 30% from its May 2017 trough.

Jefferies thinks this more recent rally in the stock is only beginning.

2. HCV? What's that?

The reason, as Jefferies explains, is that Gilead's flagship hepatitis C (HCV) treatment business has shrunk to little more than tugboat-size. Last quarter, SEC filings showed that sales of Gilead's antiviral products Sovaldi, Harvoni and Epclusa accounted for only about 32% of the company's total product sales. That was down from 38% of sales over the past nine months. What's more, when Q4 results (and 2018 guidance) come out, Jefferies is predicting we will see that "HCV is <20%" of the company.

On the one hand, this is not unalloyed great news. In its 2015 heyday, HCV treatment sales powered Gilead to more than $18.1 billion in GAAP profits and nearly $19.6 billion in annual free cash flow. As HCV sales have ebbed, however, the company has shrunk to the point where trailing-12-month earnings are just $11.6 billion, while trailing free cash flow (FCF) amounts to less than $11.8 billion. That's a 36% decline in accounting profits, and a 40% decline in cash profits.

3. Goodbye, HCV revenue, we hardly knew ye

On the other hand, though, the steep decline into (near) irrelevancy of Gilead's HCV business could permit Gilead to resume growing in other ways.

"[B]uyside expectations and sentiment [for Gilead are] already low," observes Jefferies, thanks to the declining HCV business. However, the analyst sees "better days ahead" as Gilead shifts its emphasis to growing the new CAR-T cancer treatment business that it acquired with its purchase of Kite Pharma last year.

Surveying opinions voiced by its competitors, Jefferies observes that "consensus EPS" predictions for Gilead show most analysts believe the company will resume growing in 2020 and beyond. Jefferies believes that the time to buy Gilead is before this growth becomes obvious and drives Gilead stock price up.

Bonus thing: What it means to you, the investor

According to data provided by S&P Global Market Intelligence, analysts who track Gilead's fortunes see the company's net profit shrinking 23% by the end of 2017, and then falling 25% again to just $5.76 a share in 2018. At first glance, this may suggest that the beginning of 2018 is an inopportune time to buy Gilead stock.

But wait -- in 2019, S&P Global estimates show Gilead turning around and growing earnings 2%. Then growing 17% in 2020, and growing again 15% in 2021. Assuming that's the new trajectory we should be focusing on, then Gilead stock that trades today at 14.5 times projected 2018 earnings (and pays a 2.6% dividend yield) could look like a pretty nice bargain come December 2018.

Jefferies is right. The time to buy Gilead Sciences stock is before that happens -- not after.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

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