Bristol-Myers Gets a Shot in the Arm

Bristol-Myers Squibb (BMY) got some exciting news from a study on experimental drug ipilimumab.  The study concluded that the drug was effective at bolstering the immune system of patients with advanced melanoma, although some side effects were severe.  On average the trial improved life spans of these patients by about four months, a major difference by all accounts.  Bristol-Myers plans to file application with the FDA later this year in order to market the drug, and some analysts have estimated peak annual sales of up to $1 billion.  Based on the news, analysts at Goldman Sachs (GS) have upgraded their rating to a buy.  The favorable result of the study in addition to the analyst upgrade has BMY stock soaring more than 7% in afternoon trading.

As far as we are concerned, Bristol-Myers did not become undervalued as a result of the study; it has been undervalued for some time.  However, sometimes it takes a catalyst such as this in order to get a stock moving in the right direction.  As you can see from our ratings history chart, we have viewed this stock as undervalued for the majority of the last two years with only short periods as fairly valued mixed in.  We think it is easy to see why we have held this positive stance when we compare historical valuations to the stock’s current valuation.  For example, over the last ten years BMY has historically commanded a price-to-cash earnings multiple of between 23.6x and 34.7x, but the current multiple of cash earnings is less than half the low end of that range at just about 11x.  Furthermore, trading at 2.14x sales per share, BMY looks like a deal compared to the historically normal range of 2.05x to 3.02x times sales per share.

Coming into the day, Wall Street expected Bristol-Myers Squibb to have sales of $19.8 billion this year and $20.7 billion in fiscal 2011.  So, all other things being equal, the ipilimumab compound would bring an additional 5% growth if it hits the most bullish of targets.  That potential growth is certainly a positive in our analysis although Roche’s is currently working to develop a competitor that could take a bite out of that market share.  At the very least, this may serve to halt or even reverse the prevailing trend of analysts lowering BMY’s sales and profit estimates for the last two months.

We are reconfirming our Undervalued stance on BMY following today’s news and the resulting run up for the shares.  The stock’s valuation looks attractive compared to the market’s historical valuation.  For an investor looking for a long term play in the drug stocks, Bristol-Myers should at least be a consideration.  The stock has a beta of only .75 and it yields more than 5% annually, so the downside should be less severe if the market does continue to slide.  On the other side of the coin, this stock will likely not be the highest flier in a rally, but we believe the risk/reward is favorable.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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