Buy, Sell, Or Hold Bristol-Myers Squibb At $60?

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BMY: Bristol Myers Squibb logo
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Bristol Myers Squibb

Bristol-Myers Squibb’s (NYSE: BMY) stock has declined 6% since the beginning of this year (through April 13), compared to a 15% decline for the broader S&P 500. Despite this outperformance, we believe that Bristol-Myers Squibb stock can see some more upside from the current levels of around $58.  The key is Bristol-Myers Squibb’s stock is up only 4% since the start of 2018, a little over two years ago. Our dashboard, ‘What Factors Drove 4% Change In Bristol-Myers Squibb’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price didn’t gain over the past two years despite strong revenue and earnings growth for the company. Bristol-Myers Squibb’s revenues were up 26% from 2017 to 2019. This combined with a 171% jump in net income margin from (a depressed) 4.8% in 2017 to 13.2% in 2019, helped earnings per share swell 231% (from low levels). Note that these numbers are based on Bristol-Myers Squibb’s GAAP figures. The reason for the low margin in 2017 was tax provisions of $4.2 billion, as compared to $1.4 billion in the prior year. This can be attributed to the impact of changes in the U.S. tax laws. This led to lower EPS in 2017, thus swelling the EPS growth over the following years. For comparison, on an adjusted basis, Bristol-Myers Squibb’s EPS grew 56% between 2017 and 2019.

A sizable drop in Bristol-Myers Squibb’s P/E multiple (back to more normalized levels) has largely mitigated the rise in the company’s earnings. Bristol-Myers Squibb’s P/E multiple dropped from 93.1x (again due to the changes in tax law, GAAP EPS figure was low, thus swelling the P/E ratio) at the end of 2017 to 31.6x by the end of 2019. Moreover, Bristol-Myers Squibb’s P/E is down to about 29.2x now, given the volatility of the current situation. This reflects a 69% decrease in P/E multiple since December 2017.

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The reason for Bristol-Myers Squibb stock’s underperformance over the recent years can partly be attributed to its acquisition of Celgene. Earlier in 2018, the market was sensing Bristol Myers-Squibb to be acquired by a large pharmaceutical company, which didn’t happen, and the stock price corrected sharply by over 20% between Feb 1 and Mar 31. The company announced its intention to buy Celgene in January 2019, and it faced a few roadblocks during the process, resulting in stock volatility. Also, given the merger, the company’s total debt increased sharply from $7.4 billion in 2018 to $46.7 billion in 2019. In November 2019, the company closed the merger transaction and its stock price moved up around 35% between Jan 1 and Nov 30. With the Celgene acquisition, Bristol-Myers Squibb’s oncology portfolio has become one of the largest, and it will likely see cost synergies in the coming years. The acquisition also provided access to a huge pipeline of drugs. We believe there is a potential upside for Bristol-Myers Squibb’s multiple when compared to levels seen over recent years – P/E of 32x at the end of 2019, and 29x currently.

How Is Coronavirus Impacting Bristol-Myers Squibb’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact Bristol-Myers Squibb’s revenues, as it faces supply chain disruptions, and potential impact on direct sales due to postponement of minor health related issues and surgeries. Between January 31st and April 13th, Bristol-Myers Squibb’s stock has lost 6% of its value (vs. about a 15% decline in the S&P 500). A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Notably, the company derives a bulk of its revenues from the U.S., which has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe. The outperformance of Bristol-Myers Squibb’s stock in the current crisis can partly be attributed to its top selling drug, Eliquis, which has consistently added over $1 billion in incremental sales over the past 5 years. This along with the company’s newly acquired portfolio from Celgene will continue to drive strong growth for the company in the coming years.

In the near term, though, revenues are likely to be impacted by the ongoing crisis. We believe Bristol-Myers Squibb’s Q1 results in May will confirm the trend in revenues. Going by historical trends, we believe that the company’s stock could potentially offer upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

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