Ascendere Associates LLC October 22, 2010J. Stephen Castellano Page 3 email@example.com
We are glad to see
Gilead Sciences Inc. (GILD)
back on our "high-quality" list after a six-month hiatus. On April 21 of this year, GILD sold off nearly 10% to $40.76after reporting a good quarter but reduced guidance, compelling us to write a "screaming buy" report on the shares. The crux of our argument was that despitea near-term peak in operating momentum and long-term uncertainty with its drug pipeline, given its strong ROIC profile and a PE multiple of 11.8x our "ultraworst case estimate" of $3.45 for calendar year 2011 EPS, GILD was severely undervalued.Apparently as punishment for making a call that was probably
contrarian to most of the 22 sell side analysts covering this stock, it declined another 22% over the course 4 months to $31.83 on August 31, 2010. Since thenthe stock has recovered back to $39.11. The stock continues to trade at absurdly low levels -- 9.7x a consensus EPS estimate of $4.04. As a result, we give GILD ascore of 5 out of 5 for Relative Value, and Fundamental Quality scores a high-five as well. Analyst Revisions are moving positively again, and we give this metric ascore of 4 out of 5.GILD reported a better than expected quarter on October 19, driven by strong HIV treatment sales and its ongoing stock repurchase plan.
The Wall Street Journal noted that GILD is trading in line with Merck & Co. (MRK) and Eli Lilly & Co. (LLY). Given Gilead's strong ROIC profile and plenty of
breathing room to get a new pipeline prior to major patent expirations in 7 years, GILD's low valuation continues to be one of the most absurd things we haveseen in a long time and, as such, is managing one of the few major share repurchase programs that has ever made any sense. With Analyst Revisions trendingup again, and a management intent on buying back its undervalued shares, this stock may continue attracting momentum investors.If you liked CSX Corp. (CSX) last week, you will love
Union Pacific Corp. (UNP)
this week, according to our relative ranking models. Last week, CSX Corp. madeour "high-quality" list, but this week it was knocked off as a result of relatively better financial reports from Industrial sector companies, including Union PacificCorp. At $42.6b, UNP's market cap is nearly twice as large as CSX and now sports a better cumulative factor score than CSX. UPN trades at 13.7x the calendaryear 2011 EPS estimate of $6.29 and pays a $1.32 annualized dividend for a yield of 1.4%. UNP is trading at a slight premium to CSX, but this is justified by itsstrong analyst revision momentum, which scores a 5 out of 5. UNP reported a strong quarter following the market close on October 21, with 3Q10 EPS of $1.56beating Street consensus of $1.50, driven by better than expected prices and cost control. This prompted a number of positive analyst revisions to estimatesand price targets. UNP's debt stands at $9.8b, cash is $1.4b, and its debt-to-capital ratio is decent at 31%. Debt-to-capital would only move up to 39% if itacquired CSX, though we note we have no inkling of the possible synergies between the two or any of the antitrust issues that might be raised. But what bettertime to make an acquisition, just prior to a possible upturn in the economy and during growing evidence that freight traffic is recovering? If the PE spread everwidens significantly more between the two companies, a M&A analysis might be worth some time. Until then, UNP looks like a solid industrial stock, replacingCSX relative to last week.This week the ADRs of
Telecom Argentina SA (TEO)
also catch our attention, showing highest scores for Relative Value, Operating Momentum and FundamentalQuality. The company is trading at only 7.8x the consensus 2011 EPS estimate of $2.97 per ADR and has net cash on its balance sheet. It is a mystery to us howany capital intensive company like a telecom can have net cash, but those are the numbers. TEO is growing revenues and earnings at an impressive clip despitereports of a saturated mobile and fixed line telecom market due to value added services. Perhaps Verizon and AT&T ought to pay a visit to TEO; maybe they willlearn something. This company deserves further study.
Moving Off the "High-Quality" List
Of the 18 companies moving off the list, notably are Assured Guarantee (AGO), The Chubb Corporation (CB) and CSX Corp. (CSX). We highlighted CB and CSX lastweek, but updated financial reports and associated rankings have pushed these stocks off the list again on a relative basis. Assured Guarantee has moved upabout 25% MTD in anticipation of benefitting from mortgage putbacks, but analyst revision momentum has declined beneath our cutoff point relative to otherFinancials. For additional deletions, see our table below.