December 29, 2014
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
The turbulence in Gilead Sciences, Inc. ’s stock price after two weeks of pressure following recent news it had been passed over by major benefits provider Express Scripts in exchange for the cheaper drugs provided by AbbVie means now is an ideal time to by, wrote Citigroup in a note to investors Monday.
In a note titled “Buy Buy (Me Back) Baby,” the head of Citi’s biotech analysis team, Yaron Werber, argues investors could get a boost if Gilead decides to buy back some shares in order to shore up its own capital position.
“Gilead stock is weak and we believe that the weakness is overdone as we expect that the levels of discounting will be comparatively lower than being feared in the street,” wrote Werber. “As a result we believe this is a great opportunity for management to get more aggressive on stock buybacks and show their confidence in their company.”
Citi said that with $14.8 billion of cash flow in 2015 and an additional $36 billion of cash flow in 2016 and 2017, a stock buyback is viable. “To put this in context, Gilead bought 13.8 percent of its stock in 2010 at its peak level of stock buyback when the stock was trading at 9 times the next 12-month EPS estimates,” said Werber.
Based on that analysis, $5 billion or $10 billion in stock repurchase at $95 at the beginning of 2015 would boost Citi’s target price by $3.1 and $7.5 respectively and DCF per share by $1.4 and $5.1.
“There is precedent for substantial buybacks…Gilead did $4 billion in share buybacks in 2010 accounting for 14 percent of market cap,” said Werber. “In September, Gilead completed the $5 billion repurchase plan authorized in January 2011. Gilead has been more aggressive than other companies in the past and that shows their ability to take decisive action when they believe the stock is undervalued.”
