Massive discount, ongoing global health concerns make BMY too good to pass up

If you’re like me, you can really only take so much of the daily commentary on any news media outlet that is entirely and completely fixed on COVID-19. That isn’t to minimize the importance of the crisis-level measures that, I think are appropriately being taken on a national scale to try to slow the spread and manage our way through the weeks and months ahead. It just means that I think we all reach a level of exhaustion from hearing about it all of the time. I know I do.

For some investors, that exhaustion manifests itself by pulling out of the market altogether, leaving it alone for a while, and coming back to it again at some point down the road when they feel more comfortable, or better-equipped to deal with their investments on a regular basis. I’m not opposed to that idea; I think that in many ways, that is often healthier than worrying about missing an opportunity that might come about right now. The great thing about the stock market – no matter whether it is going up or down, or what time of year it is – is that there is always a new opportunity just around the corner.

That said, if you are still engaged, it’s always nice when market tension is high, volatility is elevated, and broad momentum is strongly bearish to find a good company not just at a “nice price,” but possibly even a GREAT price. The push since February into bear market levels has erased massive amounts of capital in even the largest, most established names. That’s hard to take if you were buying stocks before the drop happened, but if you were smart, and careful with the size of the positions you were working with, it is still manageable. Even better is if you’ve also been able to preserve some financial liquidity, so that when those good companies at great prices come along, you’re in position to take advantage.

I think that Bristol-Myers Squibb Company is a stock that fits the profile I’m describing. The stock is down about -23% from its high in January of this year as it followed the direction and pace the broad market set from February until now. It is actually well above its bottom, however, having rebounded strongly this week from a low around $46.50 to its current price around $53. In November last year, the company completed the acquisition of Celgene, which as you’ll see below, boosted the stock’s intrinsic value in a BIG way. With an excellent balance sheet, one of the strongest, long-term development pipelines in the Pharmaceutical industry dovetailing with what I think will inevitably an increased level scrutiny and attention – appropriately so, and in the long run, to our collective benefit – on proper health and care on an individual level. I’m not one to try to capitalize on unfortunate circumstances, or to minimize what is going on in the world today; but if you want to keep your money working for you right now, I think stocks like BMY are a smart area to focus on. Let’s run the numbers.

Fundamental and Value Profile

Bristol-Myers Squibb Company is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of biopharmaceutical products. The Company’s pharmaceutical products include chemically synthesized drugs, or small molecules, and products produced from biological processes called biologics. Small molecule drugs are administered orally in the form of a pill or tablet. Biologics are administered to patients through injections or by infusion. The Company’s products include Empliciti, Opdivo, Sprycel, Yervoy, Eliquis, Orencia, Baraclude, Hepatitis C Franchise, Reyataz Franchise and Sustiva Franchise. It offers products for a range of therapeutic classes, which include virology, including human immunodeficiency virus (HIV) infection; oncology; immunoscience, and cardiovascular. Its products are sold to wholesalers, retail pharmacies, hospitals, government entities and the medical profession across the world. BMY has a current market cap of $118.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 30%, while sales increased 33%. In the last quarter, earnings grew by 4.27% while sales improved by 32.2%. BMY’s Net Income versus Revenue over the last twelve months is a little over 13%, which is impressive, but plunged in the last quarter to -13.29%. That sounds alarming, but I attribute the big shift to the transitory period required to integrate two huge operations Bristol-Myers and Celgene – into a single company. That isn’t insignificant, but I think it is also something that will show improvement in the quarters ahead.

Free Cash Flow: BMY’s Free Cash Flow is healthy, at a little more than $7.2 billion. That translates to a Free Cash Flow Yield of 6.57%. That is also a big increase from the beginning of 2019, when Free Cash Flow was about $5.2 billion.

Debt to Equity: BMY has a debt/equity ratio of .84, which is generally conservative and indicates the company has a disciplined approach to debt management. As of the last quarter, cash and liquid assets were an impressive $15.3 billion versus $43 billion in long-term debt. Pre-merger, BMY had just $5.3 billion in debt versus more than $8 billion in cash; however management as well as most analysts expect the deal to be immediately accretive, which means the debt should still be more than serviceable.

Dividend: BMY pays an annual dividend of $1.80 per share, which at its current price translates to a dividend yield of about 3.65%, which is attractive.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $118 per share, which means that BMY is massively undervalued, with more than % upside from its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s upward trend from July of last year to its peak in late January at round $68.40. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The drop from that point coincides with the rest of the market, and so does the current bounce. If market enthusiasm, driven by this week’s injection of stimulus from the Federal Reserve and Congress continues, the stock could see upside in the near term to its next likely resistance at around $58 per share; but if previous fears about the spread and real impact of COVID-19 come back into place, the stock could easily drop back to its current support in the $46 range.

Near-term Keys: The only red flag in BMY’s fundamental profile is the last quarter’s negative Net Income; that is significant, and something to pay attention to, but I also remain convinced that is a reflection of the short-term effect of integrating Celgene into its organization. Overall, this a company with excellent fundamentals; even if the $118 “Fair Value” I mentioned earlier is over-optimistic, the stock’s January peak around $68 is about 30% above its current price. That is more than adequate to call BMY a terrific value right now. If you prefer to focus on short-term trading strategies, watch to see if BMY can maintain its current bullish momentum. If it continues in the next day or so, consider buying the stock or working with call options with an eye on $58 as a useful profit target. If momentum shifts back to bearish conditions, you might consider shorting the stock or buying put options; but plan to be quick about taking profits anywhere in the $46 price range.

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