Bristol-Myers: Value Trap of Undervalued Buy?

10/08/2019 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Bristol-Myers Squibb (BMY) is best known for developing immunotherapies, biological drugs that induce a patent’s immune system to attack cancerous tumors, suggests Richard Moroney, blue chip stock specialist and editor of Dow Theory Forecasts.

Unlike its drugs, which battle malignant threats from within, many of Bristol-Myers’ biggest challenges come from external forces.

Politicians could move to curb price hikes on drugs, or regulators could thwart its plans to acquire rival Celgene (CELG) in a cash-and-stock deal worth about $74 billion.

Stocks like Bristol-Myers can turn out to be value traps. However, we see the Long-Term Buy as worth the risks for the following reasons:

* Solid operating growth: Per-share profits climbed 28% on 10% higher revenue for the 12 months ended June. During that stretch, the average S&P 1500 Index drugmaker increased earnings 10% and revenue 3%.

Bristol-Myers’ growth has also been steady, with profits up in 13 of the past 14 quarters and sales rising in 18 straight. The company’s two biggest drugs generate its strongest growth.

Lung cancer drug Opdivo (30% of sales for the 12 months ended June) delivered 36% higher revenue over the past year, followed by blood-clot treatment Eliquis (29% of revenue), which grew sales 32%.

Together, Bristol-Myers and Celgene will own a roster of nine drugs with annual sales exceeding $1 billion. The pending Celgene deal cleared a regulatory hurdle in August, when Bristol-Myers said Amgen (AMGN) would pay $13.4 billion in cash to acquire Celgene’s psoriasis drug Otezla. Management expects to complete the Celgene deal by the end of 2019 or early 2020.

* Increasingly bullish analyst sentiment: The consensus projects 3% lower per-share profi ts and 3% higher sales for the September quarter, followed by 1% growth for both metrics in the December quarter. However, analysts’ long-term profit estimates have risen sharply over the past 60 days, with the consensus now projecting 43% profit growth for 2020 and 19% for 2021.

* Shares historically perform well at this price: At 11 times trailing earnings, Bristol-Myers trades well below its five-year average of 36 and industry average of 15. Historically, Bristol-Myers has rewarded investors for buying at current valuation levels.

Since 1993, when the stock’s monthend trailing P/E ratio has dipped below 16, it proceeded to average a total return of 26% over the next 12 months — more than double the 12% average for all periods. Additionally, the stock had increased in value 12 months later in 100% of these 61 periods, versus 70% of all periods.

* Shares gaining momentum: Although the stock has struggled for much of 2019, it rebounded in the past couple months. Bristol-Myers shares slumped 15% through the fi rst seven months of the year, missing out on the S&P 1500 Index’s 19% rally. But the stock has surged 11% since the end of July, while the S&P 1500 fell 3%.

* Fat yield and steady, modest dividend growth: The stock yields 3.3%. Bristol-Myers boosted the payout in each of the last 13 years, averaging 3% growth.

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