Gilead Sciences, Inc. (NASDAQ:GILD) shares are up more than 13.30% this year and recently decreased -0.70% or -$0.57 to settle at $81.17. Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN), on the other hand, is up 2.43% year to date as of 01/17/2018. It currently trades at $2.95 and has returned -0.67% during the past week.
Gilead Sciences, Inc. (NASDAQ:GILD) and Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect GILD to grow earnings at a -14.08% annual rate over the next 5 years. Comparatively, ACHN is expected to grow at a 17.58% annual rate. All else equal, ACHN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Gilead Sciences, Inc. (GILD) has an EBITDA margin of 62.85%. This suggests that GILD underlying business is more profitable GILD’s ROI is 31.00% while ACHN has a ROI of -16.20%. The interpretation is that GILD’s business generates a higher return on investment than ACHN’s.
Cash is king when it comes to investing. GILD’s free cash flow (“FCF”) per share for the trailing twelve months was +1.43. Comparatively, ACHN’s free cash flow per share was -0.12. On a percent-of-sales basis, GILD’s free cash flow was 6.15% while ACHN converted -0.11% of its revenues into cash flow. This means that, for a given level of sales, GILD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. GILD has a current ratio of 3.70 compared to 22.70 for ACHN. This means that ACHN can more easily cover its most immediate liabilities over the next twelve months. GILD’s debt-to-equity ratio is 1.18 versus a D/E of 0.00 for ACHN. GILD is therefore the more solvent of the two companies, and has lower financial risk.
GILD trades at a forward P/E of 11.91, a P/B of 4.27, and a P/S of 3.86, compared to a P/B of 1.17, and a P/S of 27.87 for ACHN. GILD is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. GILD is currently priced at a -5.21% to its one-year price target of 85.63. Comparatively, ACHN is -49.05% relative to its price target of 5.79. This suggests that ACHN is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for GILD and 2.10 for ACHN, which implies that analysts are more bullish on the outlook for GILD.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. GILD has a beta of 1.13 and ACHN’s beta is 1.47. GILD’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. GILD has a short ratio of 2.81 compared to a short interest of 2.40 for ACHN. This implies that the market is currently less bearish on the outlook for ACHN.
Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) beats Gilead Sciences, Inc. (NASDAQ:GILD) on a total of 8 of the 14 factors compared between the two stocks. ACHN is more profitable, higher liquidity and has lower financial risk. In terms of valuation, ACHN is the cheaper of the two stocks on an earnings and book value, ACHN is more undervalued relative to its price target. Finally, ACHN has better sentiment signals based on short interest.