“Check out Gilead. Profit up 36% from a year ago. Well ahead of expectations at 78 cents [non-GAAP] versus a 67 estimate. The revenues grew 31% from a year ago. Product sales strong, royalties strong, but the stock is down. Only thing I can see, that they didn’t do was raise their guidance and maybe that’s about it. Gilead, which has been pretty much dead money for three months, not getting a pop on the results…go figure, scratch your head.”– CNBC’s Closing Bell 10/20/2009
Gilead Sciences (GILD) reported a record breaking third quarter on Tuesday evening, yet shares dropped lower in after hours trading. Earnings came in at 72 cents per share, which topped consensus estimates of 67 cents thanks to strong sales of AIDS related treatments as well as royalties from Tamiflu. As we have said before, we believe that revenue growth is actually more important in some cases than is earnings growth for this earnings season. Gilead reported a record sales quarter as product sales were $1.65 billion up 23% and total revenue was $1.8 billion up 31%. This 
growth exceeded even the lofty 28% growth that analysts had anticipated because of increased demand for flu drugs like Tamiflu.
The royalties from Tamiflu attributed 8 cents to earnings, but this was to be expected as Tamiflu has been in high demand with the prevalence of H1N1. However, the vast majority of Gilead’s revenue still comes from its antiviral franchises. Each drug saw sales increase individually and collectively the antiviral franchises saw sales growth of 19% to $1.47 billion.
The drug maker topped both sales and profit expectations, but apparently the market was unimpressed. It’s unclear what exactly the company can do to appease, if record breaking sales and net income increased by 36% over last year did not do the trick. The commentator on CNBC quoted above speculated that there was some disappointment that the company did not raise guidance. This is the sort of stock that we love to see in our research style because they are strengthening fundamentally and yet the market seems to give them no credit for it. Gilead’s stock is just about even over the past twelve months, and is down 9% year to date.
We are reaffirming our Undervalued stance on GILD shares at present levels. Based on the strong growth in both sales and earnings, this stock has the ability to appreciate into the $60 range relatively easily. It is curious that Gilead Sciences just continues to do the right things and yet the stock never gets a lift. We do not see a reason why this is the case, and would expect to see some of the value recognized sooner rather than later.
