As of the end of the first quarter of 2022, Bristol-Myers Squibb (NYSE:BMY) had generated total returns of 17.1%. This compares very favorably to the SPDR S&P 500 ETF Trust’s (NYSEARCA:SPY) loss of 4.9% over the same period.
What most stood out about an investment in Bristol-Myers-Squibb at the end of 2021 was its low valuation. The stock appeared significantly undervalued at the time. Here’s what I said about the company at that time:
“We expect adjusted earnings-per-share of $7.48 for the year. This gives the company a price-to-earnings ratio of just 8.2 using expected fiscal 2021 adjusted earnings-per-share…
“…We believe a conservative fair value price-to-earnings ratio for Bristol-Myers Squibb is 13.5. This is by no means a high price-to-earnings ratio. The S&P 500’s price-to-earnings ratio is 28.7 for comparison. It’s worth noting that Bristol-Myers Squibb traded above a price-to-earnings ratio of 13.5 for much of the last decade, prior to 2020.
“If the company returned to a price-to-earnings ratio of 13.5 from its current price-to-earnings ratio of just 7.9, investors would realize gains of around 70%.”
BMY Stock Isn’t Done Growing
Bristol-Myers Squibb’s price has increased significantly in 2022, but I believe there’s still plenty of room left for the stock to run further. Our fair price-to-earnings ratio estimate for Bristol-Myers Squibb hasn’t changed.
The company’s earnings-per-share are coming in better than we hoped for. The company closed out fiscal 2021 with adjusted earnings-per-share of $7.51, slightly ahead of our estimate of $7.48.
And the company’s management is guiding for even better earnings-per-share in fiscal 2022. The company’s adjusted earnings-per-share guidance is for a range between $7.65 and $7.95. Our fiscal 2022 estimate is for adjusted earnings-per-share to land at $7.80, at the midpoint of guidance.
Based on its end-of-quarter share price of $73.03 and expected fiscal 2022 adjusted earnings-per-share of $7.80, Bristol-Myers Squibb is trading for a price-to-earnings ratio of just 9.4. For comparison, the S&P 500 is trading for a price-to-earnings ratio of 25.6 using trailing-twelve-months earnings.
With a current price-to-earnings ratio of 9.4, and a target price-to-earnings ratio of 13.5, we believe that there is still 44% upside to Bristol-Myers Squibb at current prices. The stock still appears significantly undervalued.
Bristol-Myers Squibb stock still rewards investors for holding it and waiting for valuation levels to rise, because the stock offers a relatively high dividend yield of 2.9%. This isn’t the enviable 3%+ yield the stock offered three months ago, but it is well above the S&P 500’s dividend yield of 1.3%.
On top of the low valuation and solid dividend yield, Bristol-Myers Squibb also has positive growth expectations ahead. The company is targeting 3.9% adjusted earnings-per-share growth this year based on the midpoint of guidance. This growth is coming off of excellent 16.6% adjusted earnings-per-share growth in fiscal 2021. From fiscal 2012 through fiscal 2021, the company generated phenomenal adjusted earnings-per-share growth of 23.1% annually.
Don’t Fear the Patent Cliff
That being said, we are expecting growth to slow in coming years due to the company’s blockbuster pharmaceutical Revlimid beginning to lose its patent protection this year. Indeed, “patent cliff” fears are likely why investors can buy BMY stock at such a discount right now.
But fear-influenced investors are missing the bigger picture at Bristol-Myers Squibb. The company’s management team expects low to mid-single digit revenue growth from 2020 through 2025. The company is not expected to shrink, despite current fears.
Despite the runup in price over the first 3 months of 2022, we continue to believe that Bristol-Myers Squibb is both undervalued and a strong buy for investors looking for value, safety and dividends.
On the date of publication, Ben Reynolds held a long position in BMY stock.
Ben Reynolds founded Sure Dividend in 2014. Today, Ben continues to run Sure Dividend to help individual investors build high quality income portfolios. Ben graduated Summa Cum Laude from University of Houston with a finance degree. His work through Sure Dividend has appeared on Forbes, Fidelity, Motley Fool, The Street, Yahoo! Finance and more.