I'm always on the look out for potential deals. When I see a well known, blue chip type company take a 20% hair cut, worth roughly $25b in market cap, I take notice. This is why Bristol-Myers Squibb (NYSE:BMY) recently jumped to the top of my target list and made its way into my portfolio. I initiated a position in this beaten down company last Friday, when shares were down 16% at $63.45/share. Today (Monday) when shares were down another 5%, and so I bought another lot of shares at $60.02/share. I will continue to add shares on weakness should it occur. I look forward to holding shares of this blue chip biotech for years and years to come, collecting its reliable dividend and reaping the rewards associated with its well diversified product portfolio and pipeline.
BMY has been on my radar for some time now. Without a doubt, this is a high-quality company with a well respected brand name and a long history of creating wealth for its shareholders. Like other large-cap names in the healthcare space BMY seems to be a relatively safe bet for retail investors who are willing to buy and hold for the long term. Although healthcare stocks have experienced volatility as of late, primarily driven by political rhetoric, I believe the sector is an attractive space to invest in due to its relatively defensive nature and the growth offered by constant technological and scientific advances. For awhile now I've been overweight in the healthcare sector. However, all of these great things - solid balance sheets, large cash flows, stable dividends, and impressive top line growth prospects - have to be viewed alongside fundamental valuations, which is why I had never purchased BMY shares before Friday's sell-off.
Before shares took a 20% hit, the market had placed a high premium on BMY shares (roughly 30x ttm EPS). This was largely due to the tremendous success of the company's oncology portfolio, and namely Opdivo, which also is the drug that sparked recent volatility. Frankly put, I'm not qualified to speak about this drug, or any others in the space, with any sort of detail. I'm not a healthcare professional, which is why when investing in healthcare I put a lot of faith in the research done by several sector specific analysts who've gained my respect and obviously have a much deeper understanding of the field than I do. Rather than discuss the recent turmoil surrounding Opdivo myself, I will simply refer readers who haven't already read up on the failed phase 3 trial to fellow Seeking Alpha contributor, DoctoRx, and a recent piece focused on the matter. I follow his work here on SA closely and really value his insights on bio-tech/healthcare related matters.
Although the science that these healthcare companies deal with is oftentimes over my head, I still feel confident in my ability to analyze companies in this space from a fundamental point of view. And now, post sell-off, with the stock trading at 23x current 2016 EPS expectations and only 18.5x 2017 average EPS estimates, I believe shares are attractive. Now, obviously these estimates (especially the 2017 figure) are subject to change and likely will be adjusted downward as the many analysts who track BMY digest the Opdivo failure and what impact this will have on BMY's market share in lung cancer and oncology in general moving forward. Downgrades are sure to come, though for now the current average estimates are all I have go to by. Because of the diverse nature of BMY's portfolio, I expect that over the long term, this one trial's miss won't greatly effect the company's ability to produce earnings and therefore pay me an annually increasing dividend.
Out of the 20 analysts that cover BMY stock, only 2 have made adjustments to their estimates since Friday's Opdivo news. First, Morgan Stanley downgraded the stock from Overweight to Equal Weight, adjusting the price target down from $81/share to $63/share. The Morgan Stanley analyst estimated that 2020 Opdivo revenues would fall by 28% to $8.1b and noted that Merck could take significant share with what now appears to be the lead in first-line lung cancer treatment.
On Monday, Credit Suisse got into the action, downgrading the stock to neutral from outperform, moving their price target down to $63 from $86. The firm was quoted as being "stunned" by the failure and expressed fears that few catalysts were on the horizon for a sentiment change when it comes to BMY. However, the firm also touched upon the fact that the much reduced market capitalization may lead to takeover talks regarding BMY, though their analysts expect that the market will want more clarity surrounding Opdivo's future prospects before paying the high M&A premium that would be expected in a take over bid.
So, thus far it seems as though the professionals are targeting a price somewhere in the low $60s, which is where the stock currently sits. I know many retail investors don't like relying on this analyst coverage for their buy and sell decisions, though I think when news is coming fast and furious in an event like this, paying attention to what these firms are saying is a good idea, especially when trying to look at the market as a whole and predicting where the reactionary dominoes will fall.
Investors interested in BMY also should take note that the company currently has a late stage study underway, testing Opdivo with another drug, Yervoy, which would potentially enable them to take back some of the first-line market share that will likely be lost by this recent failure. This was a highlight of Evercore ISI's Mark Schoenebaum's reaction to the trial miss where he discusses the $4b of sales that BMY will likely lose to Merck because of Opdivo's initial failure. However, results from this study aren't expected until early 2018, meaning a potential positive catalyst for Opdivo with regard to first-line market share appears to be a long ways off.
As you can see here in these graphs taken from BMY's 2015 annual report, although much of the recent focus has been on Opdivo, which is definitely a groundbreaking produce with massive growth potential, the rest of the company's portfolio should not be disregarded. BMY has many billion-dollar franchises and even though investing in biotech usually about investing in future growth, I'm happy to see the wide variety of revenue streams that this company offers in the present. This isn't a one trick pony by any means, which is refreshing in the bio-tech space.
And finally, moving past Opdivo, we get to the financials. Honestly, if it weren't for this company's illustrious history, I would likely pass up an investment because the company's performances in many of the metrics that I prioritize aren't stellar by any means. However, I do prefer to own blue chip names, trusting to a certain extent, that the talented management teams will continue to achieve excellence over the long term, just as they have in the past. Yes, yes, I know: past performance doesn't guarantee future results. However, I like partnering with top-notch talent and typically, it resides with the blue chip names (because that's where the money is). This, more than anything, is why I've added Bristol-Myers to my basket of biotech/healthcare holdings.
So, as you can see here, BMY has struggled a bit with revenue growth over the past few years. The company's EPS and cash flow/share figures were not rising steadily as I would typically like to see. Management is not taking steps to reduce the share count, though I admit that the annualized dilution over the past five years has been slight. Long-term debt has been reduced since 2013 and I hope to see this trend continue. And lastly, while the company has made a habit of increasing its dividend (which now yields 2.5% after the stock's terrible performance over the last two trading days) and currently boasts a seven-year dividend increase streak, there have been times when neither EPS nor free cash flow/share covered these payments, which is worrisome to me as a dividend growth investor.
|2011||2012||2013||2014||2015||ttm||*fiscal year in millions|
|Free Cash Flow/Share||$2.64||$3.79||$1.48||$2.07||$0.64||-$0.06|
|Outstanding Share Count||1630(mil)||1641(mil)||1653(mil)||1661(mil)||1671(mil)||1671(mil)|
In a recent article I wrote here on Seeking Alpha discussing my target prices post earnings releases, I highlighted BMY, having this to say about the company:
"BMY is still a leading company in an industry that I like moving forward and I would be happy to have exposure if the price was right. Unfortunately for me, that "right price" is basically inline with flash crash lows of last August around $51, or 20x 2016 expected EPS. I highly doubt I'll see this price anytime soon, though I'm happy, watching and waiting."
I acknowledge the fact that by buying shares at $63 and $60, I violated my own target price. However, unfortunately for me (though very fortunate for all of those who are very long the market right now) many of the companies I was following over the last several weeks beat their earnings expectations and I wasn't able to pick up shares on the cheap like I had hoped. I'm still sitting on an outsized cash position and I want to put some of those funds to work in the markets. Because of this desire, I've decided to lower my standards for margin of safety with a portion of that cash, slowly transitioning into equities with fair valuations. After BMY's recent sell-off, I believe the valuation is fair, which is why I've decided to initiate a position.
So, all in all, while I believe the recent sell-off has been over done, I acknowledge that BMY still has its issues and I will closely track the company moving forward. I respect the company's past and believe it has the potential for a bright future as well, though I hope management takes steps to tighten up the balance sheet a bit. I'm happy to have finally added this blue chip name to my healthcare exposure alongside other dividend payers such as Johnson & Johnson (NYSE:JNJ), Gilead (NASDAQ:GILD), Amgen (NASDAQ:AMGN), AbbVie (NYSE:ABBV) and another new addition to the basket that I've also purchased over the last couple of days, Novo Nordisk (NYSE:NVO). These six companies, alongside healthcare REITs Ventas (NYSE:VTR), Omega Healthcare Investors (NYSE:OHI) and Capital Care Properties (NYSE:CCP), and my more growth oriented holdings, Celgene (NASDAQ:CELG), Regeneron (NASDAQ:REGN) and Geron (NASDAQ:GERN) round out my healthcare exposure. I look forward to whatever the future holds for these wonderful companies (I will note that calling Geron a "wonderful company" at this point in time is a stretch, though I'm very hopeful for Imetelstat's future) and I hope to continue to add shares of companies in this space when their values become attractive.
Disclosure: I am/we are long BMY, GILD, AMGN, CELG, REGN, GERN, JNJ, OHI, VTR, CCP, NVO.
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.