More On Healthcare

Due to healthcare reform, the weak Euro and European austerity measures revenue expectations in bio-pharma companies should be reset 5% lower. The stocks have already reset 15% lower and have more than discounted this and have even discounted further cuts which may or may not occur. Valuations in the space were very low before this and are now ridiculously low.

As an example ex-cash Gilead trades at less than 4.5 times peak earnings. They should earn their stock price ex-cash in the next 5 years. Healthcare has always been a growth space that attracted growth investors. There is currently a transition going on in the shareholder base from growth to value. This transition should be accelerated by the share repurchases and consolidation in the space. I believe there will be no looking back once the transition is complete.

3 comments:

Anonymous said...

Why doesn't Gilead pay a dividend?

People want yield in these things, even if it is just a token.

Tsachy Mishal said...

I would rather see them buy back stock at these prices than pay a dividend. When a stock is undervalued a buyback adds value while a dividend is taxed a second time.

Anonymous said...

GILD's stock is selling off because the rate of product revenue growth slowed to 15%. Compare GILD to Salesforce.com (CRM), selling at a modest PE of 149 and 70 times EBITDA. Salesforce.com's revenue growth rate in the most recent quarter was 23% YOY. Does CRM have a deeper moat than GILD? Will their franchise be equally solid in 2017 or 2021? Unlikely. A likelier scenario is that either an upstart or a despised dinosaur like Microsoft or Oracle will wipe Salesforce.com out. Or Netflix, at a PE of 54 and a revenue growth rate of 23%--do they have a longer-dated franchise than Gilead? THe problem with these recognitions as the basis for an investment strategy is that idiocy can persist for a long time--three years, in the case of the Pets.com phase of the internet bubble. I have been betting on a mean reversion for over a year, and good companies keep lagging bad ones. When will it end?