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Gilead's Earnings Are Not What You Think They Are

Summary

Gilead's earnings per share are higher than most believe.

Gilead's share repurchases are the reason.

Without future growth, Gilead will be able to report $14 in EPS for the current year.

Gilead (NASDAQ:GILD) is a very profitable company, but most investors and even financial analysts misjudge Gilead's true earnings power due to a methodical mistake.

The calculation

Usually a company's earnings per share are calculated in the following way: One sums up the reported earnings per share numbers for the past four quarters. This is the correct approach (or an almost correct approach) in most cases, but this approach does not reflect changes in a company's share count.

Let's look at an example: When we have a company which earned $2 per share in the first quarter of the last year, $2 per share in the second quarter, $4 per share in the third quarter and $4 per share in the fourth quarter, this would get us to trailing earnings per share of $12. If the share count remained flat over the last year, there is no problem with this calculation.

But if the share count was 1 million in the first two quarters, and 500,000 during the third and fourth quarter, it looks a little different: In that case, the company's net income would have been $2 million in every quarter, or $8 million for the year. Using a year-end share count of 500,000 shares, I believe it would be more appropriate to say that the company's earnings per share were $16...


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