Bristol-Myers Squibb (NYSE:BMY) is an excellent drug company that specializes in oncology, immune and cardiovascular drugs. However, BMY stock is worth a good deal more than its present price, selling well below several measures of its value. I estimate it is worth over 50% more than its present price.
Last year, Bristol-Myers Squibb closed on its roughly $74 billion cash and stock acquisition of Celgene. Therefore, the company is still in the process of “digesting” that purchase.
Bristol-Myers produced guidance in its first-quarter earnings saying that it would make between $6 and $6.20 per share this year. That puts BMY stock, trading at $59.80 on Monday, July 20, on a cheap forward price-earnings ratio of just 9.6 times.
Moreover, analysts polled by Yahoo! Finance estimate earnings will hit $7.42 per share next year. That makes the stock even cheaper at just 8 times earnings.
To put this in perspective, the average P/E ratio for the company in the past four years has been over 27.7 times.
Check Out the Contingent Value Rights (CVRs)
If you have a speculative bent, you might look into the BMY Contingent Value Rights (CVRs). They trade separately on the NYSE under the symbol BMY.RT. There might be other symbols depending on how you look it up. This is a security that was created from the Celgene acquisition.
It relates to three experimental Bristol-Myers drugs. If two of the three are approved by the FDA by the end of 2020 and if the third is approved by the end of Q1 2021, CVR holders get $9 per right. The opportunity here is that right now, the CVRs trade for just over $3 per right.
Keep in mind, however, that this is a highly speculative, “binary,” and all-or-nothing trade. Holders get nothing if the FDA delays any of the three drug approvals. You can read this article by Barron’s which describes the situation in more detail.
Prospects Are Excellent For Bristol-Myers
Last quarter, Bristol-Myers showed excellent sales growth for the former Celgene cancer drug Revlimid. Sales were $2.9 billion in Q1, up 14% from 2019. Moreover, sales of the anticoagulant Eliquis were $2.6 billion, up 37%. On a pro forma basis, as if the acquisition was previously in place, sales were up 13% for the company in Q1.
The CEO said that “the strength of our financial results and pipeline progress in the first quarter reflect” its successful execution. Recently the company’s oral multiple sclerosis drug Zeposia was approved by the FDA but it delayed its launch due to the Covid-19 outbreak. It said the delay was in the best interests of its patients, customers, and employees. It also does not appear to have any formal Covid-19 vaccine drug trial in process.
Assessing the Value of BMY Stock
Right now the stock is very cheap with an attractive 3% dividend yield. This is in line with its historical dividend yield. The table at the right shows that the company has paid a consistently growing dividend.
In fact, this next dividend will be the fourth time that BMY has paid 45 cents per share.
As you can see, typically the company will raise the quarterly dividend by the fifth quarter. Shareholders can expect that this will happen again. This will be a driver for BMY stock to move up.
Moreover, as I showed above, the stock trades well below its historical price-to-earnings range.
In addition, based on a comparison with eight other peer stocks, the average P/E ratio should be 16.2 times. At the multiple, the stock would be worth 68% more than Bristol-Myers’ present stock price.
Putting all three of these values together, the historical dividend yield, its historical P/E and the comp-based P/E, the stock is worth $110.96, or 86% above today’s price.
However, even if its next year’s earnings are priced at today’s P/E of 9.6 times, the stock is worth $71.40, 20% above today’s price. So, averaging these two target prices, the mean target price is $91.13. This represents a potential gain of over 52% from today.
What To Do With BMY Stock
Bristol-Myers Squibb is a good long-term value stock with an attractive dividend, cheap valuation and good upside. In addition, the company’s merger with Celgene provides good long-term growth prospects.
Investors with a speculative bent might also consider investing a portion of their stake in the contingent value rights. One way to conservatively do this is to take the dividends you receive from BMY and put them in the CVRs. That way, in a sense, you are playing with house money with this gamble.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.