With earnings season just around the corner, it's time to start looking at the best performing sectors and stocks of the past few quarters. Of those, health care stands out as a sector and Bristol-Myers (NYSE:BMY) stands out as an individual stock.
On the sector basis, health care has consistently produced earnings growth at the top end of the market and beat expectations by double digits. Within the sector, Bristol-Myers has done the same. The coming quarter is expected to be no different.
In fact, due to the recent quarters of growth posted by Bristol-Myers, analyst expectations have risen as well. While I concede the point that the company is likely to meet these expectations, I do not see much chance of them producing the kind of earnings beat that has been driving the stock over the past 6 months.
Current quarter estimates, Q2 2016, are for $0.66, up roughly 6% over the past 3 months, with a similar increase expected in the next quarter. On a year-over-year basis, 2016 earnings are expected to grow by 37%, and then another 25% in 2017. While this is fantastic for investors, there is risk present in that growth is expected to slow on a year-to-year basis.
Compared to the broad market and the health care sector, Bristol-Myers is carrying a very high valuation, trading at roughly 35 times forward earnings. The healthcare sector as a whole, represented by the Health Care Select Sector SPDR ETF (NYSEARCA:XLV) is trading at only 15.5 times forward earnings, above the 5- and 10-year averages. Sector companies Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck & Co. (NYSE:MRK) and Allergan (NYSE:AGN) are all trading between 14.5 and 17.5 times forward earnings, making Bristol-Myers the highest valued company in the sector. Granted, the company is certainly worth a premium, it is doing a great job, but this valuation raises red flags nonetheless.
Positive Developments During The Quarter
There have been a number of positive development during the quarter. Perhaps the most notable is growing acceptance of the cancer treatment Opdivo. This drug regimen has received yet another approval from regulators, the 8th in 2 years, and is now accepted as a treatment for Hodgkins Lymphoma patients who have relapsed or are not responding to other treatment. This is significant because until now there has been no avenue for patients of this class.
Opdivo was also approved in Europe for the treatment of melanoma.
Opdivo has shown positive results in the treatment of advanced bladder cancer.
To put the importance of Opdivo in perspective, sales of the drug were up nearly 1,000% percent in the prior quarter and is the number 2 selling drug behind Eliquis. Sales of Opdivo increased more than 1,700% from the same quarter of 2015.
Others include the approval of Empliciti in the Europe and positive results for the rheumatoid arthritis drug Orencia. Empliciti is a joint venture between Bristol-Myers and AbbVie (NYSE:ABBV) for the treatment of multiple myeloma. Orencia is showing positive results for arthritis patients who test positive for biomarkers which indicate poor prognosis. Orencia sales were up 18.8% in the previous quarter.
Risks Are Present
As always, there are some risks present. The first, in my opinion, is Obamacare. The Affordable Care Act has undoubtedly increased sales of drugs by providing access to health care for individuals who would not have other wise received it. With the election only a few months away and the outcome too close to tell, I'd say there is a big chance for the ACA to be repealed. If so, it will likely have an impact on the entire health care complex, not just Bristol-Myers and the drug makers.
Other risks, and less likely to have material impact on the stock, is a recent FDA warning about Abilify, a drug whose use was already in fast decline. The FDA is now requiring labels to disclose warnings of compulsive behavior, including gambling, spending, hyper-sexuality, over eating and the possibility it will cause the onset of diabetes. Sales of Abilify were once a revenue leader for the company but fell 94% in the previous quarter and are now the slowest selling drug in the portfolio.
In terms of the portfolio, there are 6 top selling drugs with revenue in decline, including Abilify. This represents 43% of the portfolio, not including "mature and all other" products which are also seeing notable declines in sales. Without Opdivo and Eliquis seeing such dramatic increases in acceptance and use, BMY would be posting year-over-year declines in total revenue as well.
The Bottom Line
The current consensus price target for BMY is $76.38, a gain of roughly 6.5% from today's prices. Taking into account the high P/E multiple and the low target of $48, downside risk is at best -24% and at worst -50%.
The bottom line is that BMY is still a great company with solid revenue, a decent dividend and a pipeline set for future growth. However, considering the company's high valuation and heightened expectations for growth, there is enough risk to keep me out, at least until after earnings are announced. If you own it, BMY is a definite hold; if you don't, now is not the time to get in.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Bristol Myers is a strong company in a strong sector with positive forward expectations. I am looking to add this to my portfolio but do not think now is the time. Earnings are released in 6 weeks, at that point I will re-evaluate valuation and forward outlook with the intention of a possible buy-in.