Bristol Myers Squibb (BMY)

[chmcnfunds]

Bristol-Myers Is Poised To Break Out In 2017

Dec. 27, 2016 4:52 AM ET|13 comments | About: Bristol-Myers Squibb Company (BMY), Includes: AMGN, GILD, LLY, MJN, MRK, PFE, XLV

Alexander J. Poulos Alexander J. PoulosPremium Research »Follow(4,285 followers)

Summary

Bristol-Myers has managed to frustrate numerous investors this year.

Expectations were running ahead of themselves as BMY was poised to garner a first line monotherapy designation for Opdivo in NSCLC.

The stock price collapsed upon a notable clinical failure.

As detailed below, BMY offers a compelling value in the pharma/biotech space.

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As 2016 draws to a close, the year will go down a rousing success for many investors. Multiple industries have posted stellar gains, yet I have often found last year's laggards often become the next year's winners. The article below will update my bullish stance on Bristol-Myers Squibb (NYSE:BMY) as the calendar flips to 2017.

The Year to Forget

BMY started the year off with a bang as its lead oncology compound seemed poised to dominate the oncology space. Bullish pieces flowed like water as analysts tripped over themselves to issue higher and higher buy prices centered around the continued clinical progress registered by Opdivo.

The second leg down occurred when results came in from the Checkmate-026 trial for the use of Opdivo as first-line monotherapy for Non-small Cell Lung Cancer, one of the largest oncology markets. Opdivo did not meet its statistical endpoint shocking most and leading to heavy selling pressure. It remains my belief from the onset that first-line therapy would revolve around the use of multiple agents to yield optimal results. Unfortunately for BMY bulls, Merck (NYSE:MRK) Keytruda now owns the first line monotherapy market. Undaunted, BMY has multiple shots at its goal with its in-house combo of Yervoy in addition to licensing deals with other players in the field.

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Source

The optimal configuration for BMY would be for superior results to come from in-house controlled Opdivo/Yervoy yet BMY has wisely hedged its bets with partnerships.

2017 Guidance

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BMY's initial 2017 guidance masks the real power of its Oncology franchise as BMY awaits further data to power revenue growth. True earnings power is hidden by BMY's high R&D spend as they are funding multiple clinical trials to ensure the broadest label possible for its Oncology franchise. As the products mature, the need for a heightened level of R&D will diminish thus providing higher profits to the bottom line via a reduction in spending. The key here is sustained revenue growth, with BMY possessing the most favorable revenue growth profile for the next five years of the major pharma players.

Role of the Dividend

BMY is often associated with a dividend growth entity, yet the profile of the company has changed as they have spun-off their non-core products such as Mead Johnson (NYSE:MJN). BMY has morphed more into a biotech outfit and should be viewed through a similar lens as Gilead Sciences (NASDAQ:GILD) and Amgen (NASDAQ:AMGN) instead of more diversified entities such as Eli Lilly (NYSE:LLY) and Pfizer (NYSE:PFE).

BMY does pay a dividend of 39 cents per quarter of a yield north of 2.5% yet dividend growth the next few years will remain anemic as BMY priority remains building out its oncology offerings. BMY should be viewed as a growth play with an income component versus a dividend growth play.

Management indicated their intention to return an additional $3 billion to shareholders via share repurchases. I have no doubt this is in response to the steep fall in the stock price; I subscribe to management's view that the oncology pipeline in its entirety offers significant value.

Technical Overview

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The share price has recovered from the violent sell-off in October after the full details of the failed Checkmate trial were released. I posted a recent article on BMY discussing the merits of the company's stock only to be blindsided with a violent sell-off as the full results of the failed trial were revealed. Fortunately, for the BMY longs patience has been rewarded as the stock has come back closing the downward gap formed in early October. In hindsight, the sell-off in October reeks of capitulation selling as funds headed for the exits with the US presidential election looming.

The entire sector received a "Trump Bounce," yet unlike its pharma/biotech brethren BMY continues its elongated basing pattern as it steadily pushed higher. BMY has closed notably above the level witnessed post-election indicating that the move has nothing to do with short covering and is more indicative of value players gaining exposure for a leg up heading into 2017.

Source

I would not be at all surprised if the most notable laggard for 2016, the healthcare sector, led the charge in 2017 as investors rediscover the virtues of the industry. Healthcare underperformance is 2016 is quite unusual, yet by adopting a longer term view illustrates the staying power of the sector. The sector has returned 10% annualized based on the performance of the Health Care SPDR (NYSEARCA:XLV). I am using the XLV as a proxy. The only sectors that have performed better are the Consumer Discretionary at 10.28% and Consumer Staples at 10.55%. A bit of mean reversion is in order here: the XLV's dreadful underperformance in 2016 bodes well for a snap back in 2017.

Conclusion

As the calendar flips to 2017, I suspect the healthcare sector as a whole will begin to recoup the ground lost in 2016. At its current quote, the healthcare space is now undervalued with multiple names trading at below market multiples in this typically defensive sector. I would not be at all surprised if "hot money" leaves some of the areas that have experienced a huge run in 2016 and reverts to those that have underperformed. BMY exhibits the classic signs of an equity in an unloved sector that seems poised to break out substantially higher; I would not be at all surprised if BMY tested the open gap at roughly $64 early in 2017 especially if it can break above the resistance of its 200 day moving average at $62.92. I would like to thank you for reading; I look forward to your comments.

Investors are always reminded that before making any investment, you should do your proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be regarded as general information, and not relied on as a formal investment recommendation.

Disclosure: I am/we are long BMY, GILD, PFE.

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: Long BMY via puts and calls.

http://seekingalpha.com/article/4032799-bristol-myers-poised-break-2017?app=1&auth_param=udil:1c64eek:a798e01ec50ad0ad79536eb606d10540&uprof=46
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