Global stocks: Gilead delivers

The biopharmaceutical company has shown why it should be in any serious international investor’s portfolio, while FireEye, Cummins and Pfizer have reported in line or better-than-expected results.

Of the 400 or so companies in the S&P500 index that have reported earnings to date for the first quarter of 2015, over 70 per cent have reported earnings above the mean estimate and 46 per cent have reported sales above the mean estimate. Currency has been a factor here.

Blended earnings (which combine actual results for the companies that have already reported with estimates for the remaining companies) have declined 0.4 per cent. If the index reports a year-over year decline for the quarter, it will be the first time since the third-quarter 2012 (-1.0 per cent). That’s due to the sharp fall (60 per cent plus) of the energy component.

However, for the second quarter of 2015 only 41 companies have issued negative EPS guidance so far. On a valuation basis, the current 12-month forward price-earnings (PE) ratio of the US market is 16.8. This PE ratio is based on a S&P 500 index price of 2088.51 and forward 12-month EPS estimate of $US124.23.

After analysing the results of seven of our international stock recommendations last week, we look at four more below: Gilead Sciences, FireEye, Cummins and Pfizer.

Gilead Sciences

Gilead announced that first-quarter earnings almost doubled as its key hepatitis C drugs, Sovaldi and Harvoni, generated about $US4.45 billion in sales, well ahead of estimates. Gilead earned $US2.94 a share for the quarter as revenue surged 52 per cent to $7.59bn.

Analysts polled by Thomson Reuters expected per-share profit of $US2.32 and revenue of $US6.92bn. That is a substantial if not spectacular EPS “beat” of $US0.62!

HCV treatment volumes are accelerating quicker than predicted. Gilead estimates 90,000 patients started treatment in the US and EU and that 260,000 have been treated since the Sovaldi launch.

While Gilead agrees that IMS data points to a flattening in the US market, management believes it is too soon to draw conclusions and see significant growth remains ex-US.

Gilead is confident that they can treat 250,000-300,000 patients in the US and there is an expectation for capacity to treat 100,000 patients in Europe. With a 90 per cent market share and 70 per cent commercial to 30 per cent public payer mix, there is ample opportunity to sustain sales over the long term in the US.

The HIV business was impacted by an inventory drawdown. HIV sales were $US2.4bn, slightly below some analysts’ estimates. Increased Medicaid/ADAP purchases, which have higher discounts, were also to blame. HIV sales will most likely recover in the second quarter as inventory levels rebound.

Gilead’s guidance was positive, raising its 2015 forecast for product sales by $US2bn to a range between $US28bn and $US29bn. It also announced that it would start paying a quarterly dividend of 43 cents a share in June.

Our take: Concerns that competition will impact on revenues and market share are not apparent (the bear case). Pricing has stabilised at lower rebates than originally feared. Competition from Merck is unlikely to materialize until the second quarter of FY16.

After another blowout quarter, Gilead remains one of our most compelling “buys”. Trading at 8 times 2015 EPS and growing earnings at a sustainable 15 per cent plus compound annual growth rate (CAGR) over the next four years, this stock is as close to a core holding as you can get!

FireEye

FireEye’s first-quarter EPS of -$US0.48 beat estimates by $US0.03 and revenues of $US125.37m ( 69.5 per cent year-on-year) were $US4.81m ahead of consensus. Billings and revenue growth continue to trend at high rates (50-70 per cent Y/Y) and above expectations.

First-quarter billings totalled $US151.6m, up 53 per cent Y/Y and well above guidance of $US130-140m. Second-quarter billings guidance is at $US165-$170m, while full-year guidance has been hiked to $US825-835m from $US800-820m. Both are well above consensus and are a significant positive in my opinion. Doubters are warming to the stock.

Second-quarter and full-year revenue guidance is respectively at $US140-144m and $US615-635m, above consensus estimates of $US139.7m and $US619.8m. With spending growth remaining heavy, second-quarter EPS guidance is at -$US0.47 to -$US0.50 (versus -$0.49 consensus) and still a loss, as is full-year EPS guidance at -$US1.75 to -$US1.85 (versus -$US1.86 consensus). Sales/marketing spend is expected to equal 64-68 per cent of 2015 revenue, R&D spend should take up 35-38 per cent, and G&A should be 14-17 per cent. Growth costs money!

Thanks to strong corporate demand for threat-prevention and hacking incident response services, subscription/services revenue rose 71 per cent Y/Y in the first quarter to $US85.1m, and was 68 per cent of total revenue. Product (hardware/software) revenue rose 64 per cent to $US40.2m. GAAP operating expenses rose 41 per cent to $US205.8m, and the deferred revenue balance grew 78 per cent to $US378.8m.

The company flagged that the second half will see significant product introductions, many of which will be shown off at the May 11 analyst meeting. Capabilities will include enhanced end-point product that brings enterprise search.

Our take: FireEye continues to lead the market with its broadening cybersecurity product portfolio and is beginning to show leverage in its sales model, with shortening sales cycles as less than half of all sales now require a lengthy proof of concept.

Mandiant continues to be the gold standard of incident response and remediation for high profile cybersecurity breaches.  FireEye claims to have found more “zero-day” threats than all vendors combined in 2014. That’s no surprise.

After Gilead, FireEye is another of the highest conviction buys in the Eureka International universe. Cybersecurity remains one of the key focus areas in Enterprise IT.

Cummins

Unlike blowout numbers from Gilead and FireEye, Cummins results were pretty well in line (which is not a bad thing) although revenues of 4.7bn exceeded analyst estimates by some $US160m.

Net income grew 14 per cent to $US387m (or $US2.14 per diluted share versus $US338m).

Revenue by segment grew as follows: Engines 1 per cent, distribution 2 per cent, components 6 per cent and power generation 6 per cent. The company repurchased 1m shares during the quarter.

"We expect profitability for the remainder of the year to increase from first quarter levels as revenues improve and we capture more benefits from cost reduction activities," chief executive Tom Linebarger said in the call.

The company expects full year 2015 revenues to grow between 2-4 per cent, and EBIT in the range of 13.5-14 per cent of sales.

Our take: Cummins posted good results in spite of headwinds such as lower oil prices, a stronger USD, and slow growth in international markets. Year-on-year all segments were revenue positive, with sales up 7 per cent.

This is a well-managed, quality company for patient investors. No change in our investment thesis or target price.

Pfizer

Pfizer managed a small earnings beat of $US0.02 and delivered revenues (although currency affected) of $US10.86bn, $US130m ahead of consensus estimates.

Continuing foreign exchange (FX) impact on earnings led Pfizer to adjust fiscal 2015 guidance down.

On a segment basis, the Global Established Pharmaceutical segment, which generates the largest amount of revenues and operating earnings, saw a 16 per cent and 20 per cent drop in revenues and income before tax, respectively.

The segment for Global Vaccines, Oncology and Consumer Healthcare saw the biggest percentage gain, up 39 per cent in income before tax, mainly due to strong sales in its Prevnar 13 pneumococcal vaccine and the launch of its Ibrance breast cancer treatment drug after getting FDA approval, as well as its Nexium 24HR drug in the US.

The Global Innovative Pharmaceutical segment was up 7 per cent in operating revenues, but the FX impact pulled that down to end up with a flat quarterly result of $US3.075bn. Taking currency translation into account, income before tax declined 14 per cent to $US1.51bn.

On the call, chief financial officer Frank D'Amelio said, "As a result of unfavourable changes in foreign exchange rates in relation to the US dollar since mid-January 2015, primarily the weakening of the euro, we lowered our 2015 financial guidance for reported revenues by $500m, which resulted in a $US0.05 negative impact to our guidance ranges for reported diluted EPS and adjusted diluted EPS."

Our take: No concerns here. FX is a wash at the end of the day unless it affects competitiveness.

It’s good to see Ibrance (Pfizer’s new oncology drug) gaining early traction.  Pfizer remains the best of breed in “Big Pharma” as its reinvigorated pipeline and the biosimilar story plays out over time.

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