Pitch: GILD (Long)

Gilead Sciences is a research-based pharmaceutical company that develops and commercializes drugs in high-impact therapeutic areas, including those treating chronic immunological diseases, oncological indications, and inflammatory and cardiovascular illnesses. Gilead is known for its portfolio of effective antiviral HIV/AIDS and hepatitis treatments, developing its treatments both internally as well as through select acquisitions of existing competencies. Gilead is underpriced, because the market fails to recognize the value of its current and future therapeutic (and therefore revenue) power, and because it holds too much weight on short-term news about downward pressure on its treatment pricing.

Investment Thesis
Gilead’s key competitive advantages lie in its structural advantages and leadership in pharmaceutical development and commercialization across a vast array of therapeutics addressing unmet needs.

Drug portfolio: Gilead’s approved (and future approved) drugs are by nature long-term revenue generators, because the majority of them aim to treat chronic illnesses. The development has also been focused on life-critical treatments, so price elasticity of demand should be very low. Gilead has shown this through its leadership in HIV treatment and prevention (Truvada and Atripla). Gilead has also found a viable cure for Hepatitis C with its Sovaldi and Harvoni drugs, as well as its newest single-dose Epclusa (approved in 2016) and Vemlidy (approved 2016).

Beyond its current slate of impactful treatments, Gilead has a valuable array of drugs in progress, including hematological/oncological, inflammatory/respiratory candidates in phase 3 clinical trials. For example, Idelalisib would address patients with relapsed leukemia, and an investigational antibody, GS-5745, would treat gastric cancer. Both are increasing in prevalence today.

Partnership/Scale: Being a larger player in the antiviral and antiretroviral (and increasingly, chemotherapeutic) space affords Gilead the ability to acquire competencies, assets and talent to fuel research and development. The Gilead team has shown capability in making value-additive acquisitions. For instance, its acquisition of Triangle Pharmaceuticals enabled development of HIV treatments, and its 2006 acquisitions of Corus Pharma for $365M paved the way for entry into the respiratory space. By acquiring Pharmasset in 2011, Gilead capitalized on existing R&D at the firm to develop its acclaimed Sovaldi.

Finally, Gilead is able to capitalize its reputation to partner with other companies on higher-risk drug development. Last year, Gilead closed on a collaboration and licensing agreement with a clinical stage firm, Galapagos, to develop a phase 3 drug with three potential indications: rheumatoid arthritis, Crohn’s disease, and ulcerative colitis, all three of which are markets with expansion opportunity.

Cheap option: Gilead is trading at such a cheap multiple that it is akin to paying a small premium for the optionality of the next blockbuster. From a policy perspective, the new administration may be more open to M&A activity, which would benefit Gilead’s business model.

Valuation
Gilead Sciences is currently undervalued at $67.10/share, representing a $87.7B market capitalization (as of April 3, 2017 market close). This reflects a 6.8x P/E ratio, which is extremely low compared to its peers of similar size and therapeutic areas (including Amgen, Celgene, Novo Nordisk, Biogen, Shire, CSL and Regeneron) as seen in Fig. 1. Gilead is favorably positioned to continue growing in the therapeutic areas for which it has market power, as well as in transformative new pipeline drugs that could prove to be blockbusters. Even with a sizeable discount to peers, Gilead should trade at least in the 10-12x range or about $96.27/s - $115.52/s.

Pitch: NYSE:GPS Long

Gap Inc. is a global apparel retailer with five active brands: Gap, Banana Republic, Old Navy, Athleta, and Intermix. GPS is known for its high-quality, dependable apparel and affordable prices. GPS is underpriced, because the market fails to recognize its staying power and discounts its prospects per the backdrop of the rise of eCommerce and fast fashion in apparel, as well as the high profile distress of well-known US department stores.

Gap Inc.’s key competitive advantages lie in its structural advantages and leadership in retail across a vast variety of demographics as well as its management and operational advantages.

Brand portfolio and trademarks: Gap Inc.’s brands can be disaggregated into two distinct categories: tried and true household names (Gap, Old Navy, and Banana Republic) and newer high-quality brands to compete with up and coming trends (Athleta and Intermix). With most of its brands, Gap Inc. has full operational control. The exception is Intermix, for which Gap controls all aspects of brand development other than product design related to third party products. Gap is known to exhibit ultimate flexibility when it comes to managing its brand and was willing to shutter its Piperlime line (mix of private label and branded apparel and accessories) when it saw that this e-commerce focused line has become a drag on its performance. Its mix of brands gives it a competitive moat by targeting different price levels and apparel styles. In general, Gap Inc. is seen as both high quality and affordable, straddling the dual advantage zone. It has an established brand name which allows it to command a price premium and take wallet share from consumers.

Omnichannel: Gap Inc. maintains flexibility in its operations through its omnichannel management. Currently, Gap Inc.’s brands have retail stores that sell its own goods through both company-owned and franchise stores. Its ownership of majority of stores (88% as of Jan. 2016) allows Gap Inc. to maintain control over the inventory management, feel, and aesthetic of stores in its core geography of North America. Selectively, GPS is exploring and expanding across other geographies through franchising affiliates in Asia, Australia, Europe, Latin America, Middle East, which gives it an edge in local international markets. As Zara has shown in its local store front customization, adhering to local tastes is critical in apparel.

Gap Inc. is effectively able to price segment its customer base through its separate brands as well as through its retail vs. outlet stores. Selling through its own stores also affords GPS real-time monitoring of its inventory and feedback collection of data on its classic as well as trendier items.

Scale: As of fiscal year 2015, Gap Inc. operated 3,721 brick-and-mortar stores across six continents. Gap Inc.’s vendors number over 1,000 in over 40 countries, and vendors do not have significant supplier power, because the top 2 were only 5% of purchases by dollar volume. Twenty-four percent of purchases were from factories in China. Gap is a major employer of 141,000 employees worldwide (as of Jan. 30, 2016) and its large base allows it to cherry pick and train top talent across functions. Furthermore, its scale is an advantage in this uncertain climate for apparel retail because it allows Gap’s brands experiment without giving up too much brand identity.

Valuation
Gap Inc. is currently undervalued at $24.10/share, representing a $9.64B market capitalization (as of Mar. 17, 2017 market close). This represents a 14x P/E ratio, which is on the low end of its peers (including RL, AEO, ANF, PLCE, EXPR, and GES). Gap Inc. has a more favorable earnings profile and future prospects, so a fair valuation range is closer to 15x – 20x, which represents a price range of $25.35 - $33.80. The midpoint price of $29.58 is more reflective of where GPS should trade given its competitive advantages vs. peers and its potential over the near future.

A change in direction

Hello Blog Fam! It has been a loooong time since my last post, and I really do apologize. I have been extremely busy in my MBA program (more on this later!) and I am excited by the opportunity to share all of that with you here. I have some big news coming up and still a lot of moving parts to wrap up in the next couple of weeks, but I just wanted to provide quick update.

Over the past couple of months, I have learned a lot about different parts of business and have – to my best effort – attempted to remain open-minded about what I would like to pursue after my MBA degree. But it seems that what I have wanted since my very first day of work at 22 is still what I want today – to move into the world of direct investing.

Accordingly, I have been taking some security analysis and finance classes to build a knowledge base. Since that is such a big part of my life now, I would like for it to be part of this blog as well. I will still be posting updates about career, recruiting and experiences, but I will also be incorporating some of the things I am working on for class and extracurriculars, including investment pitches.

Stick around for more!

- The closing belle

MBA Blog #1 - The Beginning

Hi y’all! It’s me, Shell the blogger behind The Closing Belle.

That statement is kind of a lie.

First, I suppose I can’t really in all seriousness still call myself a blogger. I’m embarrassed by the length of time that has passed since my last post (nearly half a year). (I can explain.)

Second, I’m not really going to be the closing belle anymore. Yes, I am still female. Yes, I am still working in financial services. So yes, for the time being, the pun still holds. [In case you didn’t get a chance to read my bio, it’s a play on words - the closing bell is rung at 4pm at the New York Stock Exchange to signal the end of the official stock trading day, and belle means girl. As a female in financial services, and a lover of all things punny, it really STRUCK (pun intended, of course) a chord with me.]

I’m still a female human in finance, but only for two more days. Then, I’m leaving the investment management field for at least 2 years — and potentially, forever. In two days, I’m gathering all the stilettos kicked under my cubicle (assuming that my colleague J hasn’t decided to hide them again - this is a recurring theme but a story for another time), sticking that slide rule back in my purse (just kidding - we totally don’t use slide rules anymore!) and making my grand exit from the professional life to go back to school.

I’m pursuing my MBA for four main reasons: (1) the optionality that comes with the degree, particularly in higher management positions, (2) a chance to do corporate recruiting all over again and land in a more direct, transactional role than asset management - which I have always wanted to do, (3) a GPA reset to compensate for my undergrad grades (no regrets there - I took challenging and graduate level classes and would do it again in a heartbeat), and (4) make life-long friends (some might read “business connections,” but I truly do mean friends). I don’t have many real-life friends. I guess it comes with the territory of being on YouTube in all my free time.

I’m excited to go back to school.

It’s not all puns ’n roses, though. A lot of disappointments have also come with this decision. I was in a great long-term relationship with someone I love very much, and that relationship has ended largely because of the distance that my MBA would necessitate. I’m giving up my job and firm - both of which I really enjoyed and paid an income - to pursue this rather expensive endeavor. I’ve downsized to a 70 sq. ft. bedroom with no closets to be close to school and save on rent.

So really, it has its ups and downs.

I hope to capture as much of all those ups and all those downs as I can through this blog. I plan to revamp it and instead of having a focus on working life and products that I love, I will share my MBA experience with you guys.

xoxo,
the closing belle

Dear Future Me [Open: 3/5/2018] | theclosingbelle