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Is Gilead Sciences, Inc. (GILD) Destined for Greatness?

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Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let’s take a look at what Gilead Sciences, Inc. (NASDAQ:GILD)‘s  recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you’re about to see tell Gilead’s story, and we’ll be grading the quality of that story in several ways.

Gilead Sciences, Inc. (NASDAQ:GILD)Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company’s become more efficient over time. Since profits may not always reported at a steady rate, we’ll also look at how much Gilead’s free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Gilead’s share price has kept pace with its earnings growth, that’s another good sign that its stock can move higher.

Is Gilead Sciences, Inc. (NASDAQ:GILD) managing its resources well? A company’s return on equity should be improving, and its debt to equity ratio declining, if it’s to earn our approval.

By the numbers
Now, let’s take a look at Gilead’s key statistics:

GILD Total Return Price Chart

GILD Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 38.4% Pass
Improving profit margin (25.4%) Fail
Free cash flow growth > Net income growth 16.3% vs. (1.7%) Pass
Improving EPS 16% Pass
Stock growth (+ 15%) < EPS growth 96.2% vs. 16% Fail

Source: YCharts. *Period begins at end of Q3 2009.

GILD Return on Equity Chart

GILD Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity (34.5%) Fail
Declining debt to equity (100%) Pass

Source: YCharts. *Period begins at end of Q3 2009.

How we got here and where we’re going
Gilead gets by with four out of seven passing grades. It’s not a great showing, particularly in terms of Gilead’s bottom line, which has been left far behind by its share-price growth. As a result, Gilead is now one of the costliest major drugmakers on the market, with a P/E ratio double that of Pfizer Inc. (NYSE:PFE)‘s and nearly double Eli Lilly & Co. (NYSE:LLY)‘s. On the other hand, Gilead has gotten some great results out of recent trials that neither of these companies can match. Will that be enough to justify the past year’s surge in investor optimism and bring Gilead’s score up the next time we take a look?

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