Starting into a new month, a lot of analysts right now seem to be turning more optimistic. The last two months have seen a rally in the broad market indices that has a lot of people starting to talk about how much of the February-to-March drop to bear market conditions stocks have reclaimed. How much of that optimism is realistic as the economy continues to reopen remains to be seen, especially as risks remain – not only about COVID-19, but renewing, and increasing trade tensions between the U.S. and China and surging political unrest this last weekend.
I think that it’s hard to look ahead through the end of 2020 right now and see much change on the COVID-19 front. The healthcare industry is working frenetically to develop vaccines, antivirals, and effective treatments for the virus, but the truth is that coronavirus has become part of the “new normal” in the world. The concern that I see is that individuals will stop taking precautionary measures seriously as businesses, schools and even churches reopen. It’s encouraging to see activity get restarted again, and I like seeing the way major portions of corporate America have found creative ways to keep things going, even if it is, in many cases on a more limited basis; but as that happens, the onus is put more squarely on the shoulders of each person to remember that basic measures – like social distancing and protective masks in public – should be considered requirements, not merely suggestions. The risk is that a new, secondary wave of infections could impose a reimposition of the restrictions that put the brakes on the global economy a couple of months ago. Unemployment is high now, and most experts seem to think it’s ready to hit a peak, but don’t be fooled into thinking that it can’t go higher. That would translate to an even longer extension of recessionary conditions that could balloon into a complete Depression.
All of this doesn’t mean there is a lack of opportunities to work with – even as a lot of stocks have rallied significantly off of their own bear market bottoms, there remain a lot of them out there that still offer some interesting value opportunities. Shutting down the economy until May has meant that there are few companies that haven’t felt some kind of negative impact on their operations, and so the fundamental analysis part of things has to factor that in; but finding companies with the strength in their balance sheets to absorb temporary drawdowns is an excellent to distinguish between the stocks that still offer attractive opportunities versus others that may simply carry a higher level of risk as market valuations increase while broad economic concerns remain in place.
I think that Bristol-Myers Squibb Company (BMY) is a stock that fits the profile I’m describing. From its own bear market low, the stock has rebounded by more than 30%, and is only about -12% below its January high around $68. A big part of the stock’s surge, I think can be attributed to the pharmaceutical industry’s resilience this year as one of the market’s few bright spots during the initial part of the health crisis. In November of last year, the company completed the acquisition of Celgene, which helped to boost the stock’s intrinsic value in a BIG way. Even with the impact of the last quarter on operations, the company still boasts 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 think this could be one of the smarter areas to pay attention to if you want to keep your money working for you right now. 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 $136.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 56%, while sales increased 82%. In the last quarter, earnings grew by almost 41% while sales improved by 35.7%. BMY’s Net Income versus Revenue over the last twelve months is a little over 3%, which is not impressive, and dropped in the last quarter to -7.19%. That sounds alarming, but I attribute the biggest portion of that shift to the transitory period required to integrate two huge operations Bristol-Myers and Celgene – into a single company. Add to the mix the complication of the pandemic, and I think that while the negative number isn’t insignificant, but I think it is also something that will show improvement in the quarters ahead. That has so far been borne out by the fact that in the quarter prior, Net Income versus Revenue for the prior three months was -13%.
Free Cash Flow: BMY’s Free Cash Flow is healthy, at a little more than $9.75 billion. That translates to a Free Cash Flow Yield of 6.99%. That is also a significant increase from the last quarter, when Free Cash Flow was about $7.2 billion.
Debt to Equity: BMY has a debt/equity ratio of .86, 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 $18.3 billion (an increase of $3 billion from earlier this year) versus $42.8 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 3.01%.
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 $119 per share, which means that BMY is massively undervalued, with more than 98% 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 around $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. The stock drove above every retracement line, and peaked a couple of weeks ago at around $65 per share. The stock has retraced from that point, and is just a little above the 38.2% retracement line, which I expect to provide support now anywhere between $60 and $58.50 per share. A pivot and move back to the upside should find resistance at around $65 in the near term, while a drop below $58 could see the stock find its next support around the $54.50 to $55.50 level, near to the 50% retracement line.
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. The improvement in this measure from the quarter prior is also encouraging. The stock is only about 12% away from its 52-week high, but given the underlying fundamental strength, I still think the stock offers a fantastic value proposition. If you prefer to focus on short-term trading strategies, a pivot to the upside off of current support could offer a signal to consider buying the stock or working with call options, using $65 as a near-term profit target and $68 if bullish momentum strengthens. A drop below $58, on the other hand could offer a good signal to think about shorting the stock or working with put options with an eye on $54.40 as a near-term price target on a bearish trade.