Why Bristol-Myers Squibb Loses Out Against This Rival

Jul.25.14 | About: Bristol-Myers Squibb (BMY)


We pitch two companies from the GICS sector ‘health care distributors and services’, Bristol-Myers Squibb and Express Scripts, against one another in the latest instalment of our Head-To-Head series.

The article focuses on the relative strengths and weaknesses of Bristol-Myers Squibb and Express Scripts based on business performance and sustainability/dividends/forecasts.

It ends with discussion of the current valuations of the two companies, and details whether Bristol-Myers Squibb represents good relative value at current price levels.

The Background

While Bristol-Myers Squibb (NYSE:BMY) and Express Scripts (NASDAQ:ESRX) operate within the same GICS sector of health care distributors and services, the two companies differ somewhat in terms of their business models. While Bristol-Myers Squibb discovers and develops biopharmaceutical products, Express Scripts provides a range of pharmacy benefit management services across the US and Canada.

However, we feel that a comparison between the two could prove to be a worthwhile one, since many investors will allocate capital based on GICS sectors. Therefore, they may need to decide between the two companies when allocating capital to the health care distributors and services sector.

Furthermore, both companies are going through a transitional period as Bristol-Myers Squibb attempts to counter the effects of generic drugs on its top-line and Express Scripts continues to focus on integration, with the company in the midst of a reorganization of its back-office and footprint rationalization.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.

We analyze each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

1. Return on equity

2. Return on assets

3. Operating margins

4. Quarterly revenue growth

5. Quarterly earnings growth


1. Debt to equity ratio

2. Dividend payout ratio

3. Forward yield

4. Annual EPS growth forecast

Once we have analyzed the two companies based on the first two buckets, we can then assess whether they represent good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.


1. Forward price to earnings ratio

2. Price to book value ratio

3. Enterprise value to EBITDA

4. Price to 3 year average free cash flow ratio

5. 5 year price to earnings growth ratio

So, for example, a company that performs well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below provides the data that we will use to analyze Bristol Myers and Express Scripts for the first two buckets.


Bristol Myers

Express Scripts

Business Performance

Return on equity



Return on assets



Operating margins



Quarterly rev. growth



Quarterly EPS growth




Debt to equity ratio



Dividend payout ratio



Forward dividend yield



Annual EPS growth forecast



Click to enlarge

The first bucket: business performance, highlights the superior profitability of Bristol Myers versus Express Scripts. For example, while Bristol Myers is able to deliver return on equity of 19.80%, Express Scripts can post less than half that at 8.27%. The story is similar in terms of return on assets and operating margins, with Bristol Myers being considerably ahead of its GICS sector peer. Furthermore, Bristol Myers' quarterly numbers were far superior to those of Express Scripts and we're impressed by its top line decline of just 0.50% at a time when many major health care stocks are seeing sales declines of far greater magnitude.

In terms of the second bucket, Bristol Myers again edges out Express Scripts through it having a lower level of balance sheet risk, as well as paying a dividend that yields 3.00% right now. Although we feel that Bristol Myers has a definite appeal as an income stock, we caution the current payout ratio of 82%. Clearly, this cannot go too much higher, so investors should, we believe, factor this in if they are counting on Bristol Myers to supplement their current income.

Meanwhile, Express Scripts does have a bright spot on the horizon, with its annual EPS growth forecast being very impressive at 13.58% versus -4.52% for Bristol Myers. Despite this, we feel that Bristol Myers outscores its sector peer based on the first two buckets, owing to its superior profitability, yield and lower balance sheet risk.


Due to its outperformance of Express Scripts in the first two buckets, we would expect Bristol Myers to trade at a premium. Let's see if it does.


Bristol Myers

Express Scripts


Forward price to earnings ratio



Price to book ratio









Price to free cash flow ratio



Click to enlarge

While Bristol Myers trades at a premium to Express Scripts, it is far larger than we expected. For example, Bristol Myers has a forward P/E that is 143% higher than that of Express Scripts, while its price to book and EV/EBITDA ratios are 127% and 99% higher, respectively. Furthermore, the PEG ratios highlight the valuation gap that currently exists between the two firms, with Bristol Myers having a PEG of 2.03 and Express Scripts having a PEG of just 1.03. Although their price to free cash flow ratios are more in keeping with our expectations (Bristol Myers has a price to free cash flow ratio that is 27% higher than that of Express Scripts), we feel that the valuation bucket highlights a valuation gap that is simply too wide right now. As such, we feel that Bristol Myers could underperform Express Scripts going forward.


Bristol Myers is a high quality company that posted impressive scores on The Team Money Research Rating System. We were impressed with its profitability and the relatively low level of balance sheet risk that is currently employed by the company. However, we believe that its current valuation gap versus Express Scripts is too wide and, as such, we believe that Bristol Myers could underperform Express Scripts going forward.

Here's another health care Head-To-Head article that appeared on Seeking Alpha and that you may find useful. Click here to take a look.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.