Squibb is a good company whose stock has underperformed the stock market. It may be time to take another look.
It’s not that 2021 has been unkind for Bristol Myers Squibb (BMY). It’s up 9.1% this year, but that’s about half of the
18% profit. There is nothing wrong with the company at this point. The concern is that patents on some of its drugs, including the multiple myeloma treatment Revlimid, will expire in 2025, opening the door for competitors to offer cheaper versions of the drug.
But that’s a setup for potentially big gains in the coming years, said Dan Eye, chief of asset allocation and equity research at Fort Pitt Capital Group. Bristol Myers is now trading at 8.8 times 12-month forward earnings, a discount to competitors
(MRK), both of which are traded at 12 times. But Bristol’s growth is expected to be roughly on par with its competitors. Should Bristol Myers Squibb trade at 12 times its projected 2023 earnings of $8.50, the stock would cross the $100 mark early that year. “There’s no reason Bristol can’t revalue Meyers to a multiple of 12,” Eye says. “There’s a lot of advantage there.”
The key to a higher valuation is the company’s pipeline of new drugs, which could offset any hit in market share for its current offerings. The company has several new drugs in the pipeline, such as Thrombosis Treatment Factor XIa and TYK2, which treat severe plaque psoriasis. Bristol is expected to reveal new data on the efficacy of those drugs, and if it gets Food and Drug Administration approval for the drugs — and sees solid sales of them — the market could reward the company with a higher multiple, even if profits rise. “The catalyst is that investors are becoming more familiar with Bristol’s pipeline,” Eye says. Bristol “can replace revenues affected by generic competition.”
But even assuming Bristol’s valuation remains in the single digits, it would still be a stock to own. Bristol is expected to grow earnings at a 5% clip, and that should be able to push the stock up even if the multiple stays where it is (investors will get an idea of what earnings look like when it comes to the second quarter reports results on Wednesday.) But the dividend yield of 2.9% opens up the potential for an attractive total return, especially with the S&P 500 yielding just 1.3%. Not only does that dividend seem safe, but it should grow thanks to free cash flow that should account for nearly 40% of its current market cap of $153 billion from 2021 to 2023.
“That gives them the opportunity to increase the dividend yield,” says Eye.
The stock could make big gains in the coming years. Meanwhile, investors are being paid to wait.
Write to Jacob Sonenshine at firstname.lastname@example.org