Down 30%, Is It Time To Buy This Pharma Giant?

Bristol Myers Squibb (BMY) poses something of a conundrum to investors at the moment. On the one hand, the share price has dramatically underperformed the market, leading to concerns that further declines are on the horizon. And on the other hand, the valuation is starting to look really attractive to bargain hunters.

So, is BMY a buy or a sell?

Key Points

• The drop in share price has made BMY’s 4.5% dividend yield more attractive, complemented by a $4 billion share repurchase initiative.
• BMY’s substantial debt, over $32 billion, poses concerns, yet the company’s robust 27% return on equity and projected net income growth suggest effective capital management and potential growth.
• Analysts rate BMY positively, with a target of around $64 per share, indicating significant upside potential. 

Bristol Myers Financials Are a Conundrum

If you’re not already too familiar with it, Bristol Myers is a renowned player in biopharma, particularly for its oncology portfolio but also for its extensive therapeutic interventions spanning immunology, cardiovascular ailments, and neuroscientific research.

It’s also got a range of additional drug treatments, including Orencia for arthritis and Nulojix for the prevention of organ rejection in kidney transplants as well as Eliquis to help with blood clots.

Those treatments have resulted in a revenue run rate that presents a paradox. In absolute terms, the numbers are scintillating with annual sales of $44.9 billion but the YoY growth rate has been on the decline for the past fiscal year.

As shareholders fled the stock following the disappointing top line numbers, BMY’s dividend yield of 4.5% has become more enticing. In addition, BMY’s board has endorsed a strategic $4 billion share repurchase initiative, signaling a firm belief that the company is trading at rock bottom prices.

How High Can BMY Go?

A looming question for BMY shareholders is whether its enormous debt burden of over $32 billion will act as a drag, particularly when debt re-financings are required and roll over at higher interest rates.

That debt is a double-edged sword that acts as leverage to goose returns when the economics of the business exceed the cost of capital. For BMY, it’s evident from the near 27% return on equity that management has been efficient in allocating capital wisely. Indeed net income is forecast to grow at a rapid pace over the next half decade by over 17% annually.

All that has translated to bullish analyst sentiment where, as a collective group, Wall Street deems fair value to sit just above $64 per share, suggesting meaningful upside of close to 30%.

Time to Buy BMY?

While Bristol Myers has fallen sharply over the past year, we would like to see the technical trend show some level of strength before considering it as a Buy.

With that said, on a fundamental basis, the share price does seem so far below fair value that it could be worth the payoff for value investors. Nibbling at it versus taking a big bite is probably the safest way to go at this time given the risk that the share price will replicate Baxter’s performance and display a persistent rate of decline.

Certainly, the current market reaction seems excessive and a sign of a ripe opportunity for astute value investors. For those who are a bit skittish, it’s best to wait for the technicals to reverse course and confirm the fundamental thesis. For the more speculative value investor, it’s hard to find a better bargain on a pharma giant.