Bristol Myers Squibb (NYSE:BMY) is a biopharma stock that most investors have heard of but few understand well. It also seems to be a stock that many have forgotten about because it’s looking very attractive from a valuation standpoint now.
Down 30.3% this year represents a stunning underperformance when compared to the S&P 500 that has risen by 19.4% but so too does that offer the potential for some serious upside for investors, or is BMY just a value trap?
Down The BMY Rabbit Hole We Go
While most investors know Bristol Myers Squibb for its oncology portfolio, the company has a diverse range of therapies in other areas too, ranging from immunology to cardiovascular diseases.
In oncology, BMY has Revlimid (lenalidomide), a cornerstone treatment for multiple myeloma and certain types of lymphoma, and acquired through the Celgene merger. So too Opdivo (nivolumab), used in various cancers, including melanoma, lung and kidney cancer, is a significant revenue driver for the firm.
In the same stable is Yervoy (ipilimumab) which is used primarily in melanoma, Pomalyst/Imnovid (pomalidomide), a key therapy for relapsed or refractory multiple myeloma, and Abraxane (nab-paclitaxel) used in breast cancer, lung and pancreatic cancer.
Where investors can derive comfort that revenues are and will continue to diversify beyond the concentration in oncology, though, is the firm’s increasing exposure to immunology and inflammation, cardiovascular and fibrotic diseases, and neuroscience.
For example, Orencia is used in the treatment of arthritis, while Nulojix is a medication prescribed in the prevention of organ rejection in kidney transplant patients.
So too Eliquis is a key product that helps to prevent blood clots in patients with atrial fibrillation as well as deep vein thrombosis and pulmonary embolisms.
Following its merger with Celgene, Bristol Myers also has interests in neuroscience, and has a pipeline of potential treatments for Alzheimer’s disease and other neurodegenerative conditions.
Turning our attention to the financials, what does it all mean for investors?
Massive Revenues & Profitability, But Growth Stalls
Major revenue drivers, like Revlimid and Opdivo, have contributed to the firm’s $10.9 billion in quarterly revenues as of the most recent quarter. Over the past twelve months alone, the company has delivered sales of $44.9 billion and operating income of $9.3 billion.
At first glance it’s hard to see why such a profitable company reporting massive top line numbers has fallen so precipitously in share price over the past year or so, but a clue to the answer can be found in the year-over-year growth rates.
In each of the past five quarters, revenues year-over-year have declined. Contrast that to the 39.3% YoY revenue gain in Q4 2020 and you can quickly get a sense of why shareholders have decided to allocate their capital investments to other positions.
Yet for value investors, this is the time when the company has become quite interesting. After all, it pays a 4.56% dividend yield, has a payout ratio of just 57.08%, and delivers high quality earnings consistently.
Clearly, management has spotted the disconnect between fundamental performance and share price because the Board of Directors approved a $4 billion share repurchase scheme, a strong signal that they believe the market capitalization is not representative of the present valuation.
It’s hard to disagree with them, particularly given the company has an extensive pipeline of drugs in various stages of development, including potential blockbusters that may significantly impact future revenues. But do the numbers add up?
Is Bristol Myers Stock Undervalued?
According to 24 analysts, Bristol Myers Squibb is 28% undervalued with a fair value of $64.13 per share.
It’s notable that the analysts consensus is confirmed by a discounted cash flow forecast analysis that places intrinsic value at $68.56 per share, suggesting BMY has 36% upside potential.
With $7.5 billion of cash sitting on the balance sheet, BMY has a fortress liquid position but what cannot be ignored is the firm’s $32.1 billion of long-term debt. That’s a hefty load and will become a larger drag on financial performance in coming years if interest rates don’t come back to lower levels.
Still, it’s clear that BMY shareholders don’t need to fret too much when other financial metrics are examined. For example, the company has a very respectable 9.6% return on invested capital and 26.9% return on equity in addition to a 5-year forecasted net income CAGR of 17.5%.
Combine those factors with the firm’s proven R&D capability, extensive patent portfolio that helps protect market share, and strategic partnerships and acquisitions, such as its purchase of Celgene, and it’s hard to see anything but that the margin of safety is growing ever more appealing.
Bristol Myers Squibb is a biopharmacuetical monster that is well-versed in extending market exclusivity for key drugs though formulation improvements and new therapeutic indications. By so doing, it can effectively prolong the profitability of its major products.
The combination of its manufacturing expertise, acquisitions and patent strategy in conjunction with its pipeline has proven to be a phenomenal revenue generator.
In spite of all the pluses, however, the market has shunned the stock following its lackluster revenues over the past year that have marginally declined. Arguably the 49% relative underperformance compared to the market as a whole is overdone, and value investors are likely sniffing an opportunity now.
The numbers would suggest the time to buy is either close by or has already arrived. Both analysts ratings and a cash flow analysis reveal fair value sits significantly higher, so for those willing to be a little patient, the odds are a resumption of top line growth or indeed any meaningfully positive news during a quarterly report could spark a rally.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.