Bristol Myers Squibb: Take The Red Pill
Summary
- Bristol Myers Squibb (BMY) is an undervalued pharmaceutical stock with strong positioning in cardiovascular, oncology, and immunology sectors.
- BMY has a strong balance sheet, high margins, and a pipeline of newer drugs, making it an attractive long-term investment.
- BMY stock offers a well-covered 3.5% dividend yield and has a consensus Buy rating from analysts, with an average price target of $79.
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It seemed like it was just yesterday that pharmaceutical stocks were being lauded by the market for their cash-rich and inflation-resistant business models. But thank goodness for a fickle market, as it seems that investment dollars have flown out of this sector in favor of high-flying AI stocks, and that's reminiscent of the tech bubble from the late 1990s.
This is a great thing for value investors who like buying quality on the cheap, and this brings me to Bristol Myers Squibb (NYSE:BMY). As shown below, BMY's stock price performance has greatly diverged from that of the S&P 500 (SPY), declining by 9% since the start of the year compared to the 12% gain for SPY. I last covered BMY here, highlighting its quality pipeline.
In the 1999 film, "The Matrix", Neo was granted the option of either taking the red pill and being taken to reality or taking the blue pill and falling back into the illusion. Perhaps the market needs a dose of the red pill and pay attention to companies that enjoy high margins and large cash flows.
BMY Stock (Seeking Alpha)
Why BMY?
Bristol Myers Squibb is a moat-worthy pharmaceutical company with strong positioning across cardiovascular, oncology, and immunology. This includes its leading drug development platform in immuno-oncology, which is a profitable and growing space in the pharma segment.
It's worth noting that long-time CEO Caforio (serving in his role for the past 8 years) is retiring in November this year, and will be replaced by CCO Chris Boerner, who's been with the company since 2015.
Large pharmaceutical companies have the ability to either buy new drugs through acquisitions or develop them on their own through their built up knowledge base. BMY is no different, as it enjoys high margins due to a number of high-hitting drugs such as cancer drug Opdivo and cardiovascular drug Eliquis, which remain on patent protection until 2028. Over the past 3 years, BMY has launched 9 new products which are expected to generate $4 billion in sales this year.
These factors contribute to strong profitability for BMY. As shown below, it scores an A+ profitability grade, with sector-leading EBITDA margin and return on equity of 43% and 23%, respectively.
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While revenue during the first quarter was roughly flat on a YoY basis (-1% decline excluding currency effects), it's the new products that shine for BMY. This is reflected by new product revenue more than doubling on a YoY basis from $350 million in the prior year period to $723 million during Q1.
Looking ahead, management projects that product revenue from the aforementioned 9 new products will be able to replenish the portfolio, and lead to between $10 billion to $13 billion in annual sales by 2025 from those products alone. This includes the cardiovascular drug, Camzyos, which as shown strong efficacy data. Morningstar sees potential for a significant upside to its fair value of $66 should the pipeline potential be realized, as noted in its recent analyst report:
Despite the generic pressures, Bristol is in the midst of launching an industry-leading number of new products. While Bristol expects growth between 2025 and 2030, we are forecasting declines caused by the patent losses. However, if Bristol can achieve this growth, there is significant upside to our fair value.
Recently launched drugs that hold upside include cardiovascular drug Camzyos, cancer drug Opdualag (extends the Opdivo franchise), hematology drugs Reblozyl, Abecma, and Breyanzi and immunology drugs Sotyktu (clean side-effect label) and Zeposia (a shaky start, but still has potential). Bristol's multiple shots at major market opportunities should help address the firm's long-term patent cliff.
Meanwhile, BMY maintains a strong BBB rated balance sheet with a safe net debt to TTM EBITDA of 1.5x. It also yields a respectable 3.5% and the dividend is well-protected by a 29% payout ratio, with a 5-year CAGR of 7%.
In addition, BMY can return capital to shareholders in a tax efficient manner through share buybacks, as it currently has $7 billion in remaining buyback authorization. At a forward PE of just 8.2, BMY is essentially getting an attractive 12% earnings yield on share buybacks.
Lastly, I find BMY to be attractively priced at $65.66 with the aforementioned PE of just 8.2. This appears to be too low of a valuation for a company with a solid of newer drugs. While analysts expect just 4% EPS growth this year, and low single-digit EPS growth over the next 2 years, management could boost the bottom line through share buybacks at the current discounted price.
Sell side analysts who follow the company have a consensus Buy rating, and an average price target of $79, which represents a potential 24% total return over the next 12 months.
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Investor Takeaway
Bristol Myers Squibb has been overlooked by investors as of late, which has provided a great opportunity for value and income investors to buy quality at the right price. Its solid balance sheet, high margins, and newer drugs combine to make BMY an attractive long-term play. With the stock being priced at a discount and offering an attractive and well-covered yield, income and value investors could see meaningful returns over the long run from the current level.
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This article was written by
I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.
I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of BMY either through stock ownership, options, or other derivatives. 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.
I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (19)
2023 revlimid 10b
2026 Eliquis 14b
2026 Yervoy 2b
2028 Opdivo 12b
2028 Zeposia 4.5b
43b loe exposure ?In my opinion bmy will struggle for the next 7 years to grow without a major acquisition. There will be buying opportunities better than today.
Eliquis will be another tough gap to fill
I am mildly bullish on BMY but expectations need to be tapered
