Bristol Myers Squibb (BMY)

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Bristol-Myers Squibb: Strong Fundamentals Suggest Shares Are Undervalued

Jul. 10, 2017 8:47 AM ET| About: Bristol-Myers Squibb Company (BMY)
Hudson River Capital Research

(415 followers)

Summary

Bristol Myers is still seeing remarkable revenue and earnings growth.

With a dividend yield of 2.8 percent and has a low P/E ratio relative to the industry average, shares look undervalued.

Even with Opdivo failing its phase 3 trial last year, Bristol Myers still has a large and well diversified pipeline.

Bristol Myers solid balance sheet and low valuation makes them the perfect buyout target.

Bristol-Myers Squibb (BMY) is an American pharmaceutical company which has been operating for well over a century. Their pipeline consists of innovative oncology, cardiovascular, immunology and fibrosis treatments, however, they are most well known for their immuno-oncology (I/O) cancer treatment drug Opdivo. This focus on immunology therapies has payed off very well, Opdivo and Yervoy are both I/O drugs which have been cash cows since their respective approvals. With this being said, Bristol-Myers is not just an cancer treatment company, they have approved drugs in disease areas other than cancer and have a large diversified developing portfolio of drugs. However, near the end of 2016, Bristol-Myers stock plummeted after their I/O drug, Opdivo, failed to impress in a phase 3 lung cancer trial. Shares dropped over 20 percent in reaction to this news, it was a overextended sell off which has left Bristol-Myer's share price in a depressed state ever since.

Investment Thesis

It has been nearly a year since that happened now, and we believe shares are now fundamentally undervalued. Bristol-Myer's strong fundamentals has allowed them to operate and survive for over 100 years. With a cheap valuation, strong earnings growth, and a pipeline with limitless potential, there is a possibility Bristol-Myers could even be the subject of a takeover acquisition which would create immense shareholder value. For dividend investors, Bristol-Myers is also a solid company to hold due to their 2.8 percent dividend yield.

Revenue and Earnings Growth

If we break down Bristol-Myer's sales from the last quarter, we can find some really remarkable numbers. With so much negativity about the future of Opdivo after its lung cancer trial setback, it is still seeing strong sales growth. In fact, All of Bristol Myer's prioritized brands have seen revenue growth in the double digits. Opdivo generated the most revenue for Bristol Myers totaling $1,127,000,000 in sales revenue last quarter, a 60 percent increase year over year. Eliquis trailed behind in revenue by just a few million coming in at $1,101,000,000 for the quarter, a 50 percent increase year over year. Yervoy saw a 25 percent growth in sales revenue year over year, bringing in over $330,000,000 in sales. Orencia and Sprycel brought in $535,000,000 and $463,000,000 respectively, Orencia saw a 13 percent increase in sales year over year and Sprycel saw a 14 percent increase in sales year over year. Most interestingly, Empliciti sales nearly doubled growing 89 percent year over year for the first quarter. Even when you take into consideration that the total sales revenue of Empliciti was a modest $28 million for the last quarter, it is important to take note of this great sales growth trend. Many analysts believe that Empliciti has the potential to become a blockbuster drug in the future, it will be very important for shareholders to watch the drug closely in the following quarters to come.

Bristol-Myer's saw a 12 percent increase in sales revenue year over year and generated 1.6 billion dollars in net earnings last quarter, not bad at all for such a large and well established pharmaceutical giant. During the same quarter last year, Bristol Myers only generated 1.2 billion dollars in earnings, net earnings are up over 25 percent since then. As a cherry on top, yearly guidance for both revenue and EPS was increased after their strong earnings report. That was just one quarter though, it is also very important to look at the bigger picture.

(click link for charts/tables)

Source

The graph above is the consensus revenue and earnings projections of 14 analysts for Bristol-Myers. If the estimates hold up, Bristol-Myer's profits could come close to doubling by 2021. Due to the competitive nature of the pharmaceutical industry, these projections can be far from reality. There is no way to predict if there will be any new drugs in the future that can suddenly threaten any of Bristol-Myer's drugs. Fortunately, Bristol-Myers has a large pipeline that is full of untapped potential.

Pipeline

Bristol-Myers' pipeline focuses on 4 main areas, oncology, autoimmune diseases, fibrosis and cardiovascular diseases. As of June, there are 31 compounds in Bristol's pipeline undergoing clinical trials. 30 of those drugs are either in phase 1 or 2 testing, Prostvac is the only drug in phase 3 testing. Prostvac is an immunotherapy vaccine currently being evaluated in a phase 3 trial for the treatment of castration-resistant prostate cancer, topline data from this trial is expected near the year end. 11 of the 30 compounds are in phase 2 testing with the remaining 19 compounds in phase 1 testing. While it is true that most of the drugs in Bristol's pipeline are in early clinical testing, by the end of 2020 this pipeline will start to mature and produce potential blockbuster drug candidates. Bristol's pipeline right now should be seen as a relatively new basket of eggs, just because they are not close to hatching, it does not mean it is somehow any worse then a normal basket. Not only does Bristol's basket of eggs have a lot of potential but this basket of eggs is also well diversified. The pipeline consists of two cardiovascular disease treatment compounds, 5 fibrosis treatment compounds, 8 autoimmune treatment compounds and 16 anti-cancer compounds. A well diversified pipeline makes it easy for Bristol to capitalize on increasing demand from multiple different disease areas ranging from prostate cancer to rheumatoid arthritis. There is no doubt that it will take time for this pipeline to mature, but in the mean time, investors can enjoy Bristol Myer's steady dividend.

Valuation and Dividend

One of the most attractive things about Bristol-Myer's stock is the undervalued price it is currently trading at. With a P/E ratio of 19.3, Bristol-Myers is below the pharmaceutical industry average of 23.6. Bristol-Myer's is also trading at a low price to book ratio of 6.4, also below the industry average. (All P/E ratios and PB ratios are from Simply Wall Street)

(click link for charts/tables)

Source

Bristol-Myers had a return on equity of 33.2 percent last year, a return on assets of 12.2 percent and a return on capital of 26 percent. For each 3 of these metrics, Bristol-Myers exceeded the industry average, with such strong performance, it is surprising that they are not trading at a higher valuation. Bristol-Myers is a great stock pick for value investors, their stock price trades at a price to earnings ratio which is below the industry average while outperforming the industry on several key earnings metrics.

For dividend investors, Bristol-Myers is also a solid investment choice. Since 2010, Bristol-Myers has increased its dividend for the past 7 consecutive years. Currently, their annualized dividend is $1.56, which is a yield of around 2.8 percent. Their payout ratio is 53.2 percent, not too high but not too low at the same time. As long as they continue to post strong earnings, there is no reason why their dividend will not be increased in the future. Some might argue that their payout ratio should be higher actually, but I believe around 50 percent is the perfect ratio. Bristol-Myers spends a lot on developing their pipeline and marketing their drugs to make them competitive, you first have to be able to generate earnings before you can give cash back to your shareholders. It is important to not focus too much on generating short term shareholder returns and instead focus on the bigger picture. Bristol-Myers will spend their cash wisely in order to grow the company while giving back a good amount to their shareholders, they will not make the same mistakes Gilead (NASDAQ:GILD) as made in the past. A stocks dividend payout is one of the most important factors to take into consideration, we believe Bristol-Myer's dividend is extremely appealing for investors who have a dividend investing style.

Buyout Speculation?

Although it is never a good idea to speculate, I think there are some valid points which can be made to support the idea that Bristol Myers might be bought out in the future. This idea started gaining traction in February when the famous activist investor, Carl Icahn, announced that he had an equity stake in Bristol-Myers. People thought that he would try to help push through a buyout of Bristol-Myers or a potential merger. Icahn is not the only activist investor with a stake in Bristol Myers though, Jana Partners has a large equity stake as well. This pressure from Icahn and Jana makes a buyout or merger much more likely.

When you think about it, Bristol-Myers would be the perfect mega acquisition target to acquire. They have a solid balance sheet with not too much debt, the debt they have is well covered by their annual operating cash flow. Bristol's well established pipeline is also very attractive to pharmaceutical companies looking to enter the I/O market.

(click link for charts/tables)

Source- (Eli Lilly (LLY) and Bristol Myers go back and forth from 8th-9th)

It is also important to note how cheap Bristol-Myer's shares are now. In the past, Bristol-Myers was the largest pharmaceutical company in the US, now it hovers around the 8th-9th position. Opdivo's disappointing data versus lung cancer have caused shares to tumble from all time highs and not recover. With Bristol trading at such a low valuation as a result, they are the perfect merger/buyout target.

Conclusion

Even if you do not believe in a possibility of a buyout or merger, the bottom line is that Bristol-Myers Squibb is a fundamentally sound company. Even with the Opdivo lung cancer setback, they are still generating impressive earnings and revenue growth. Their valuation is still low and it is not too late to pick up some shares in this century old company. With a dividend yield of 2.8 percent as well, Bristol-Myers is a solid bet for dividend investors too.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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https://seekingalpha.com/article/4086597-bristol-myers-squibb-strong-fundamentals-suggest-shares-undervalued?app=1&auth_param=udil:1cm6trn:40a7c2a2ca3f17eaf6ef1890e568667f&uprof=46

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