Today’s column will probably upset half the people in the country and make the other half happy. Wall Street generally favors Republicans, but it looks like for President Barack Obama's first 1,505 days in office, the Standard & Poor’s 500 has had the best return since President Dwight Eisenhower.
From the president's inauguration Jan. 20, 2009, to just about a week ago, the index has climbed 91.2 percent. Only President Bill Clinton came close with his first 1,505 days in office, showing a return of 85.1 percent in the S&P 500.
Keep in mind that Obama came in when the markets were pretty much at lows not seen for years. Nonetheless, his record gets the credit for the gain. The investment lesson to be learned here is: Don’t let your political bias cloud your investment judgment.
Obama was not my first choice for president, but rather than being bitter about it, I chose to look at companies' financial statements and ask: What is this company worth today? What will it be worth from 12 to 24 months from now?
By doing that, I’ve managed to invest in some pretty good businesses over the last 1,505 days that have had some good returns. So don’t let outside forces, political or otherwise, keep you from investing in great companies at good prices.
Tom W. has been following Gilead Sciences and knew that it split its shares on Jan 28. He was also watching Cliffs Natural resources, which I wrote about and did not buy for my clients' portfolio after noticing some problems with the business and the dividend. Since then, Cliffs has fallen from the high 30s to the low 20s. Maybe it is time to revisit that company, but today I want to focus on Gilead.
Gilead is a biotechnology company that is headquartered in Foster City. It was founded in 1987 (the year of the “big” market crash) and employs about 5,000 people. The company's products are quite vast. Some you may recognize include Emtriva for the treatment of HIV and Tamflu for influenza A and B.
Over the past year, this stock has had a nice run starting in late 2011 with a split-adjusted price of around $20 to the current mid-40s. From late to 2008 to 2011 the stock bounced around from just under $20 to just under $30.
I wonder how many investors gave up on the company in 2011, calling it dead money before the 100 percent-plus run-up. Patience is important with investing.
With the current run-up, the stock has now become expensive and close to the 52-week high of $46.37. Price to sales is now 7.3 -- well above the industry average of 5.6. Price to book value is nonexistent, since the company liabilities exceed its tangible assets. Price to cash flow is at 25.5 -- just under the industry average of 26.1.
The real problem I have is with the forward EPS estimate of $2.78 for the year ending December 2014.
Using a stock price of $45 would yield a forward PE of 16.2, I sell when our companies hit a 16.5 FPE. In other words, not much room for growth. Not to say the stock can’t go higher, but risk is also higher.
The company has done a great job of growing its sales increasing them 15.7 percent year-over-year, nearly twice that of the industry average. EPS, however, fell 8.1 percent year-over-year, while the industry experienced a 1 percent increase. Reviewing the income statement for the period ending March 31, 2012, I noticed nearly $100 million increase in labor and related expenses along with an $80 million increase in research and development.
I did notice on the cash flow statement that Gilead did have a business acquisition of $10.7 billion in that quarter and apparently some of these charges found their way to the income statement due to some accounting rules on the deal. By itself nothing to be too worried about, but it is another dent in the armor.
Looks like the recent acquisition hurt the balance sheet as well with the company showing a current ratio of 1.4, half the industry average of 2.8. The debt to equity as of Dec. 31, 2012 is now 88.3 well above the industry average of 67.6.
Return on equity looks good at 32.3 compared to the industry at 13.2. The net profit margin also looks good at 26.5 -- twice that of the industry average of 12.9.
Receivable turnover is on the light side for the company at 5.1, below the industry average of 5.6. Inventory turnover is also light at 1.6 when the industry average is 2.0; both of these efficiency ratios are for the last 12 months.
So there you have it. A once-undervalued company with a strong balance sheet is now pretty much a fully valued company with a weakened balance sheet.
Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.
Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.
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