Bristol-Myers Squibb Plus Celgene

09/27/2019 5:00 am EST

Focus: HEALTHCARE

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

In January 2019, Bristol-Myers Squibb Company (BMY) agreed to buy Celgene (CELG) in a deal with an equity value of $74 billion; the deal is expected to close at year end, notes growth and income expert Crista Huff, editor of Cabot Undervalued Stocks Advisor.

We're added Bristol-Myers, to our Special Situations Portfolio as a Strong Buy. The company markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. Celgene markets therapies, including Revlimid, for cancer and immunological diseases.

As part of the M&A transaction, Amgen (AMGN) will purchase Celgene’s OTEZLA, a psoriasis treatment, for $13.4 billion. That cash influx will be spent quite soon, because Bristol-Myers’ financial priorities include share repurchases, debt repayment and annual dividend increases.

In fact, Bristol-Myers just upped their accelerated share repurchase authorization by $2 billion, from $5 billion to $7 billion. Shareholders typically receive a 2% dividend increase in early February.

From my perspective, BMY shares are looking attractive for the first time in years. Let me start by making this clear: BMY does not fit my normal growth and value criteria. That’s why I’m sticking it here in the Special Situations Portfolio.

Bristol-Myers’ strong double-digit earnings growth of years past has given way to mid-single digit earnings growth expectations in 2019 and 2020, about 7% and 4%. And the debt levels are not only high but a bit unquantifiable, since the company is in the midst of the Celgene purchase.

However, the price/earnings ratio (P/E) is surprisingly low at 11.2. In glancing at my notes from years past, BMY carried a P/E of 18 in 2017 and 32 in 2015. Importantly, I can’t possibly be the only stock analyst who notices this uncharacteristic valuation.

I normally wait until a newly merged company has reported two quarters of results before I consider buying the stock. However, the low P/E and the prompt and successful sale of OTEZLA are causing me to believe that BMY is offering a capital gain opportunity sooner rather than later.

In addition, Celgene has been delivering 20%-30% EPS growth for quite a few years, and is expected to grow EPS by another 22% this year. The stock —  with a yield 3.4% — is rated a "Strong Buy".

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