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Bristol-Myers Deserves Better Than a Single-Digit Multiple

Bristol-Myers Squibb Co. (NYSE:BMY) recently reported first-quarter earnings that easily beat analysts' estimates for revenue and earnings per share. Despite this, shares of the company trade with a forward multiple under 10 times earnings. This development could give investors a golden opportunity to acquire shares of a company that is outperforming expectations while the market significantly undervalues the stock.


Quarterly highlights

Bristol-Myers reported first-quarter earnings results on May 7. The company generated $10.8 billion in revenue, which was an 82% increase from the previous year and $730 million higher than expected. Earnings per share increased 56% to $1.72. This was 27 cents above what the analyst community had expected.

Adjusting for the $74 billion acquisition of Celgene Corp. and divestiture of Otezla, sales increased 13%. Adjusting for the impact of Covid-19, which added $500 million to sales total, the top line grew 8%.

Bristol-Myers saw gains nearly everywhere in its portfolio.

Source: Bristol-Myers' first-quarter earnings presentation, slide eight.

Revlimid, what treats multiple myeloma in combination with other medicines and anemia, had sales of almost $3 billion. The drug has benefited from higher market share and increased duration of treatment. Patients can take Revlimid orally at home. Patients took advantage of this and stocked up on the drug prior to the Covid-19 pandemic. The company estimates added $50 million to $100 million to sales during the first quarter. Revlimid was one of the main reasons Bristol-Myers acquired Celgene as the drug is expected to reach peak sales of $15 billion by 2022, up from around $10 billion last year.

Eliquis, which is used to prevent blood clots and was Bristol-Myers' top-selling product prior to the addition of Revlimid, had revenue of $2.6 billion. This was a 37% increase from the previous year. Patient stocking due to the pandemic added $350 million to results, but Eliquis continues to see higher demand. Adjusted for Covid-19, sales were still up 19%. Eliquis is the top choice to prevent blood clots in a number of countries. Sales will likely cross the $10 billion threshold this year.

Many of Bristol-Myers' smaller medications also had robust growth in the first quarter. Sales for Pomalyst improved 29% overall, with 37% growth in international markets. Pomalyst also treats multiple myeloma, usually after other medications have failed. Orencia, which treats rheumatoid arthritis, had sales growth of 12%. Both products were higher year over year due to increased demand from patients.

Of the company's top-selling products, only Opdivo suffered a sales decline. This medication treats cancers such as non-small cell lung cancer and advanced renal carcinoma.

There has been some good news regarding the medication. Opdivo is being considered for use, in combination with Yervoy and limited course chemotherapy, by the Food and Drug Administration as a first-line treatment for patients with metastatic or recurrent course non-small cell lung cancer. This application has been fast tracked and has a target action date of Aug. 6. This same combination is also being considered by the European Medicines Agency. Bristol-Myers also announced early in march that Opdivo/Yervoy was approved to treat hepatocellular carcinoma, the most common type of liver cancer, by the FDA. While current results have been weak, Opdivo does have the opportunity for future growth if given approval by the FDA and EMA.

Wrapping up quarterly results, gross margins decreased 320 basis points to 66%, mostly due to accounting adjustments in inventory purchase price and were partially offset by improved product mix. Expenses were higher by 60% on account of $600 million of costs related to the purchase of Celgene. Research and development expenses increased 76% to $2.4 billion, $1 billion of which was the result of adding Celgene into the fold.

Bristol-Myers also reaffirmed its previous guidance for the year, with adjusted earnings per share expected in a range of $6 to $6.20 on revenue of $40 billion to $42 billion. The adjusted gross margin should be near 80% for 2020.

Dividend and valuation analysis

Until recently, Bristol-Myers has done the bare minimum to keep its 11-year dividend growth streak alive. The company has increased its dividend by an average of:

  • 2.6% per year for the past three years.
  • 2.5% per year for the past five years.
  • 2.8% per year for the past 10 years.



Investors have essentially received a one cent per quarter dividend raise for the last decade. However, that changed for the Feb. 2 payment, which was raised 9.8%. This is more than 3.5 times the average increase over the last decade.

The reason that Bristol-Myers was able to far exceed its mediocre dividend increase is that the Celgene acquisition is set to drastically improve the company's business performance. This is already evident in the most recent quarter, but will be a source of growth in the coming quarters as well. Reaching the midpoint of the company's guidance for 2020 would result in 30% growth in earnings per share compared to 2019.

The annualized dividend of $1.80 would consume less than 30% of this total. Since 2010, Bristol-Myers has averaged a payout ratio of 81%. Excluding three years where the payout ratio was above 100% (2012, 2014 and 2015), the average payout ratio drops to 59%. The expected payout ratio for 2020 is almost half of this figure.

Free cash flow looks to also improve. Bristol-Myers generated $3.7 billion of free cash flow in the first quarter of 2020, which was $2.5 billion above the first quarter of 2019. The company distributed $1 billion of dividends in the most recent quarter, giving it a free cash flow payout ratio of 27%. The average payout ratio in the four prior years was almost 58%.

Bristol-Myers paid $350 million more in dividends in the first quarter of 2020 than the last quarter of 2019 in part due to the dividend increase, but mostly due to the higher average share count. The average share count has ballooned 620 million to nearly 2.2 billion shares as Bristol-Myers used stock to fund the purchase of Celgene. Even with this, the free cash flow payout ratio shrunk as free cash flow was much improved.

The increase in free cash flow can be primarily attributed to Celgene, which generated $7.5 billion of free cash flow over the last four quarters prior to being acquired. Because of Celgene, I believe that around 10% dividend growth for Bristol-Myers is very likely to continue in the coming years.

With all the company has going for it, Bristol-Myers deserves to trade with a price-earnings multiple that is at least in line with its peers. Using the recent closing price of $59.72 and the midpoint for expected earnings per share of $6.10, shares have a forward multiple of 9.8 times earnings.

Bristol-Myers' 10-year average price-earnings ratio has ranged from 13 to more than 43. Excluding four years where the price-earnings ratio was above 28 (2012 through 2015), the average multiple is 16.5 times earnings. The up and down nature of the stock's valuation since 2010 renders the historical average mute in my opinion.

Instead, I will use peers' current valuations and expected earnings for 2020 as a means of valuing Bristol-Myers. Using this information for each individual company, the forward price-earnings ratios for Bristol-Myers' peers are as follows:

  • AstraZeneca PLC (NYSE:AZN): 27.4
  • Eli Lilly & Company (NYSE:LLY): 22.4
  • Merck & Company (NYSE:MRK): 15.0
  • Novartis AG (NYSE:NVS): 15.4
  • Pfizer Inc (NYSE:PFE): 13.4
  • Sanofi (NASDAQ:SNY): 14.8



Outside of AstraZeneca and Eli Lilly, the other major pharmaceutical companies have a similar range. A range of 13 to 15 times earnings seems appropriate given Bristol-Myers' business results and where its peers trade.

Using 2020 estimates, this would mean a price range of $79 to $92. If reached, this would reward investors with a 32% to 54% return from the most recent close. This doesn't include the 3% dividend yield that shareholders are currently paid for owning stock in Bristol-Myers.

Final thoughts

Overall, Bristol-Myers had a strong first quarter. Top and bottom-line results were well above expectations. The company saw growth in nearly all of its top-grossing medications. The lone decliner, Opdivo, could see approval for use as a treatment in other areas, which would likely lead to improved revenue results. Reaffirming guidance shows that the company doesn't expect the Covid-19 pandemic to be a major disruption to business. In fact, it actually benefited Bristol-Myers' results during the quarter.

The Celgene acquisition also appears to be paying off, making the high price that Bristol-Myers paid for the company well worth it. Besides aiding results, the acquisition will also improve free cash flow and bring payout ratios well below the historical average. This leaves room for dividend growth that tops past increases.

Still, the market continues to undervalue Bristol-Myers. With its business results and higher-than-usual dividend increase, shares should trade at a multiple that is much closer to its competitors. At the moment, the stock has a single-digit multiple, but I believe that will change as investors reconsider what they are willing to pay for the stock as Bristol-Myers looks to be in the early innings of its growth trajectory.

Investors looking for an undervalued health care stock with a solid dividend yield should consider buying Bristol-Myers at the current price.

Author disclosure: The author is long Pfizer.

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This article first appeared on GuruFocus.