Bristol Myers Squibb (Ticker:BMY) is in my opinion, one of the most undervalued companies in the current market.
On the basis of current earnings, the company is severely undervalued - with a f p/e of 7.5, and expected future sales growth of around 5-10%, this company is trading at the bottom of the barrel. This becomes even more evident when we compare it to its big-pharma brethren: Merck (arguably its closest competitor with the similarities between their respective key drugs of Opdivo and Keytruda) - trades for 11 f p/e with around 5% sales growth. This phenomenon is apparent across the industry. Additionally, when compared to BMY’s historical earnings ratio valuations, this number is around half those historic valuations.
The next thing that we need to evaluate is the company’s current drug lineup and their future portfolio prospects. Bristol Myers’ key drugs are made up of:
Revlimid (sales up 11% in the recent quarter)
Opdivo (which recently returned to serious growth in Q2, up 16%)
Yervoy (which had a blockbuster quarter with sales up 38%)
Eliquis (which has been the company’s growth driver for a long time, and 29% growth to 2.8B)
While drugs like Orencia & Pomalyst drew strong growth as well
While many concerns have been raised about the patents of the company:
Most Opdivo indications are expiraring by 2026, with many of the newer indications expiring well-beyond that
And Eliquis just won a patent court case, extending most patent challenges until 2028
The only real concern is revlimid, which expires by 2022… Though this is concerning, the revenue & profits for the drug will not disappear overnight, and will give enough time for BMY’s pipeline to catch up
This brings me to the next growth driver:
Their pipeline, bolstered by internal development & acquisitions, including the most recent one Myokardia - give BMY one of the best long-term prospects in the biopharma industry. With potential blockbusters like Zeposia & a wealth of label expansions like in Opdivo + Yervoy, Bristol-Myers is on track to realize a potential 20-25 billion dollars in annual revenue by the back half of the decade (excluding the Myokardia acquisition, which could add billions more). All of this should definitely offset any patent concerns.
Next, we should talk about their Resilient Business Model & their balance sheet.
Many investors should be relieved to hear that all of their revenue comes from life-saving & mandatory drugs that result in recession-proof business model with predictable cash flow.
This allows them to take on debt to finance opportunistic acquisitions, while maintaining 16 Billion in cash & investments, consistent paying off of debt & a generous share buyback program.
The Second-to-last thing we need to talk about is arguably the most important - their revenue & earnings projections, along with their DFC valuation.
If we undergo very safe projections of 5% revenue growth & a corresponding increase in profitability for the next 5 years (this is very realistic since they achieved 10% this year) & a 2% long-term growth rate projection, taking the 2022 expected earnings per share, we arrive at a projected value of $71.41/share with a required Rate of return of 15% annually - leaving room for serious share appreciation potential & an adequate margin of safety.
The best part is just how low risk we can make our calculations at this price. If we assume 0% perpetual growth, and 3% growth for the next 5 years, we arrive at our current price with 15% rate of return - though that leaves no margin of safety, it’s almost double the historic s&p return, with incredibly conservative estimates - something that is especially interesting considering the current market overvaluation.
The final important thing to consider is the dividend yield. BMY has 15 years raising the dividend yield, and has a very low payout ratio of 30%, a very low commitment for an over 3% yield.
In conclusion, you’ve got an undervalued company, with a predictable business model, strong fundamentals and a great dividend that pays you to wait for share price appreciation!
By: Mateo Gjinali
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