Gilead Sciences: Despite Boost From COVID Treatment, Outlook Remains Neutral

Gilead Sciences (NASDAQ:GILD) reported strong Q3 results on Oct. 28, beating consensus expectations by more than 50% (Source: E-Trade). The revenues from Veklury (remdesivir), used to treat hospitalized COVID-19 patients, provided a major boost for Q3, with consensus rating is bullish. There are more analysts who assign a neutral rating than a bullish rating, but only one analyst gives GILD a sell rating. The 12-month price target is 8.53% above the current price.

Source: Investing.com

The Wall Street consensus outlook for GILD was bullish in March and continues to be bullish. The consensus 12-month price target is about 9.2% above the current share price (averaging the values from E-Trade and Investing.com). Combined with the 4.04% dividend, the expected 12-month return is 13.24%. This value is in the range of the 10- and 15-year annualized total returns, but is far above the 3-5 year returns.

Market-Implied Outlook for GILD/h2

While the analysts assign a single target value for the price in 12 months, the options market assigns probabilities to the range of possible future prices. This probabilistic outlook reflects the market’s estimate of the uncertainties associated with GILD’s performance over the next year. I have calculated the market-implied outlook to the middle of 2022 by analyzing the prices of call and put options that expire on June 17, 2022. I have also calculated the market-implied outlook through 2022 by analyzing options that expire on Jan. 20, 2023.

The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade

The market-implied outlook for GILD to the middle of 2022 is generally symmetric, with comparable probabilities of positive and negative returns of the same magnitude. The peak probabilities are slightly tilted to favor negative price returns. The maximum probability corresponds to a price return of -5.5% and the median price return is -2%. The annualized volatility calculated from this distribution is 28%, which is neither especially high or low for an individual stock.

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

With this view, the elevated probabilities of negative returns vs. positive returns is more evident (the dashed red line is at or above the solid blue line across the entire chart).

Theory suggests that the market-implied outlook will tend to have a negative bias because investors, in aggregate, tend to be risk averse and thus willing to pay more than fair value for downside protection (put options). There is no robust way to estimate this bias, but a neutral outlook for a stock would be expected to show somewhat elevated probabilities of negative returns, as we see here. I interpret the market-implied outlook for GILD for the next 6 months as neutral with perhaps a slight bearish tilt.

The market-implied outlook for GILD through 2022, calculated using options that expire on Jan. 20, 2023, more obviously favors price declines. There is a better-defined peak in probability and this corresponds to a price return of -7.4% over the next 13.25 months. There is also a larger spread between the probabilities of negative returns and positive returns. This is a slightly bearish market-implied outlook for GILD through 2022. The expected annualized volatility calculated from this distribution is 27%.

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

The market-implied outlook for GILD is neutral to the middle of 2022, turning slightly bearish for the full year. The expected volatility for the 6- and 13-month outlooks is about 27%.

Summary/h2

Gilead reported strong Q3 earnings, due in large part to sales of Veklury (remdesivir). If there are ongoing surges in COVID-19, this revenue boost is likely to persist.

To grow earnings in the longer term, the company needs to move new drugs through the development pipeline and get them to market. Given historical challenges, the outlook is mixed. The poor 3-5 year consensus outlook for GILD reflects a lack of confidence in the company’s ability to execute effectively.

The Wall Street consensus outlook remains bullish, with expected 12-month total return of 13%. As a rule of thumb for a buy rating, I want to see expected total return that is at least half the expected annualized volatility.

GILD is just below this threshold, using the market-implied outlook’s expected volatility. The market-implied outlook for GILD is neutral to the middle of 2022, but slightly bearish for the 13.25-month period to Jan. 20, 2022. With the bullish view from the analysts and the bearish view for 2022 from the market-implied outlook, I am maintaining my neutral rating on GILD.