3 Reasons To Invest Like Buffett And Buy Bristol Myers...a very good SA article | BMY Message Board Posts


Bristol-Myers Squibb Co.

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Msg  8175 of 8509  at  10/22/2021 10:00:31 AM  by

teflon2000


3 Reasons To Invest Like Buffett And Buy Bristol Myers...a very good SA article

3 Reasons To Invest Like Buffett And Buy Bristol Myers

Oct. 21, 2021 10:40 PM ETBristol-Myers Squibb Company (BMY)

Summary

  • The recent market pullback was a paltry 5.2% and left many blue-chip bargain hunters yearning for a rip-roaring correction.
  • Fortunately, 90% of the S&P 500 fell into a correction, meaning incredible long-term buying opportunities are plentiful even with the market back to record highs.
  • Bristol Myers is the best Buffett blue-chip bargain you can buy today. In fact it's as close to a perfect "fat pitch" anti-bubble high-yield opportunity as exists on Wall Street.
  • BMY is trading at just 7.4X forward earnings, pricing in -2.2% CAGR growth while analysts expect 4% to 9% long-term growth.
  • BMY could potentially triple over the next five years, and its risk-adjusted expected returns are 3 to 4X that of the S&P 500. All while you collect a safe and growing 3.4% yield while waiting for the market to correctly price this blue chip's risk profile.
  • Looking for a portfolio of ideas like this one? Members of The Dividend Kings get exclusive access to our model portfolio. Learn More »
1000 dollars in 100 bills in a man"s hand close-up on a dark background. Hands holding dollar cash

Diy13/iStock via Getty Images

Do you dream of another market crash like March 2020 or December 2018? Those are the times when almost everything goes on sale and locking in safe income and exceptional long-term returns becomes as easy as shooting fish in a barrel.

In recent months we have faced major risks including inflation, rising interest rates, surging Delta cases, and even a potential US debt default. What was the market's reaction to all these risks?

The S&P 500 sold off just 5.2% at its peak, with the Nasdaq falling less than 8% and now the market is back to record highs once again.

JPMorgan now estimates the S&P is once more 26% historically overvalued meaning future returns are likely to be disappointing.

S&P 500 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

S&P 500 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

Frustrated investors might be thinking "where is the crash that we've been expecting for months/years!?"

Guess what? The crash is here if you know where to look.

At the recent pullback lows, 50% of the Nasdaq was in a bear market. And 20% of Nasdaq stocks were down 50+%.

What if you're not interested in high-flying and speculative tech stocks? What if you're looking for classic Buffett-style "Wonderful companies at fair prices" and frustrated at the relentless bid created by the market's "buy the fracking dip" mentality?

Well, guess what, Bristol Myers (BMY) has fallen almost 20% in recent weeks. You wanted a correction? There's your correction.

But this isn't just a "wonderful company at a fair price" it's a wonderful company at a wonderful price, which is why Buffett owns $1,756,983,000 worth of BMY in Berkshire's portfolio. Buffett's cost basis is about $60 and today you can buy Bristol at $58, a bit less than he did.

Why does Buffett like Bristol so much? For the same three reasons it's the best Buffett blue-chip bargain on Wall Street.

This DK exclusive deep-dive video walks you through, step-by-step the complete investment thesis, risk profile, valuation, and return potential of Bristol, based on the 28 analysts and rating agencies that cover its fundamentals.

Reason One: Strong Fundamentals

Dividend Safety score: 68% - 4/5 safe (1.0% average historical recession dividend cut risk, 3.2% Pandemic level recession cut risk)

Dependability score: 68% - 4/5 - very dependable

Quality score: 68% - 11/13 SWAN (Sleep Well At Night)

Long-term risk management consensus: 78th industry percentile - above-average

S&P Credit Rating: A+ negative outlook, 0.6% 30-year bankruptcy risk

2021 average fair value: $96.38

2022 average fair value: $98.92

12-month forward fair value: $98.38

Current Price: $58.32

Discount To Fair Value/Margin of safety: 40.72%

DK rating: potential very strong buy

Potential Good buy price (15% margin of safety): $83.63

Reason Two: An Anti-Bubble Price That Drastically Misprices BMY's Risk

Why did Bristol fall so sharply in recent weeks? For the same reason so many pharma blue chips fell.

House Democrats are currently working on a bill to allow Medicare to negotiate drug prices with pharmaceutical companies, which would cost the pharma industry an estimated $500 billion over a decade. While an average of $50 billion in annual revenue reductions sounds significant in absolute dollars, investors shouldn't be too concerned by this development because the U.S. pharmaceutical industry as a whole generated $539 billion in revenue last year.

So even if this bill does find its way through both chambers of Congress and makes its way to the White House to be signed into law, the U.S. pharma industry would only be set to lose about 9% of its revenue. Since 37% of Bristol Myers Squibb's nearly $23 billion in first-half revenue was derived outside of the U.S., the hit of this bill would be reduced even further.

And with three moderate Democrats and the Republican Party voting against the bill in its current form, the path to enactment appears to be limited." - Motley Fool

Politicians always talk a big game about sweeping reforms.

Let's say that Congress passes this proposal 100% intact. In that case, the likely worst-case scenario for Bristol is a 5.7% annual sales reduction.

(Source: FactSet Research Terminal)

That's because 37% of its revenue would be unaffected.

But of course, almost no proposal ever passes without first running the gauntlet of lobbyists who water bills down significantly.

Lobbying Spending By Industry Over The Last 23 Years

In the last 23 years, Pharma has been the #1 lobbyist in Washington spending nearly $5 billion, more than $200 million per year, to make sure that worst-case scenarios don't happen to big pharma.

We model policy changes around reforms to Medicare in our base case as we expect a 50% probability of enactment, and we include other lower-probability reforms (such as drug price inflation caps and international reference pricing) in our bear case or ESG point system.

For example, Bristol’s Eliquis (cardiovascular), Revlimid (cancer), and Opdivo (cancer) generate well over 50% of the firm’s total sales, and the drugs have significant exposure to the Medicare channel, but the upcoming patent loss for Revlimid should lessen this dependence." - Morningstar

Morningstar estimates a 50% chance that some kind of healthcare reform will pass, but the probability of sweeping legislation such as Medicare-for-all at "under 5% over the next decade".

The intelligent investor is a realist who buys from pessimists and sells to optimists." - Ben Graham

I'm not here to tell you what to think about healthcare policy. What I personally want to happen is irrelevant to a reasonable and prudent analysis of BMY.

The only thing that matters is what is LIKELY to happen when bills finally make it out of Congress after being watered down by that army of Pharma lobbyists.

But here's the final reason why Buffett loves Bristol, and so do I at these prices.

When worried about significant risks to a company's business model you want to make sure you have a high margin of safety. And in terms of blue-chip Pharma, they don't come any higher than BMY.

Reason Three: Incredible Medium-Term Return Potential For Patient Investors

(Source: FAST Graphs, FactSet Research)

For 7 to 20 years, hundreds of millions of investors have paid between 18 and 21.5X earnings for Bristol outside of bear markets and bubbles.

That includes the last 12 years, which includes the ACA, the most sweeping US healthcare reforms since the 1960s.

In other words, 18 to 21.5X earnings for BMY still apply during the modern regulatory environment.

What about growth rates? Maybe BMY was growing like a weed during the last 7 to 20 years?

(Source: FAST Graphs, FactSet Research)

Regardless of the regulatory environment and growth rates ranging from 5% to 37% CAGR, BMY appears to be worth about 18 to 21.5X earnings. Not my opinion but the collective determination of hundreds of millions of investors weighing this blue chips pros, cons, and risk profile.

MetricHistorical Fair Value Multiples (20-Years)20202021202220232024

12-Month Forward Fair Value

13-Year Median P/S4.19$78.77$87.57$91.34$93.86$97.21
5-Year Average Yield2.95%$61.02$66.44$66.44$72.88$80.00
13-Year Median Yield2.90%$62.07$67.59$67.59$74.14$81.38
25- Year Average Yield3.41%$52.79$57.48$57.48$63.05$69.21
Earnings18.14$116.81$135.67$145.83$151.63$155.28
Operating Cash Flow18.34$114.12$139.28$157.20$169.55$183.95
Free Cash Flow24.77$145.88$181.56$191.96$224.16NA
EBITDA12.60$83.56$127.17$127.17$133.12$139.48
EBIT (operating income)16.56$32.95$147.08$153.92$158.62$163.78
Average
$68.89$96.38$98.92$106.52$107.13$98.38
Current Price$58.34





Discount To Fair Value


15.32%39.47%41.02%45.23%45.54%40.70%

Upside To Fair Value (NOT Including Dividends)


18.09%65.20%69.56%82.58%83.63%68.64%
2021 EPS2022 EPS2021 Weighted EPS2022 Weighted EPS12-Month Forward EPS12-Month Average Fair Value Forward PE

Current Forward PE


$7.48$8.04$1.58$6.34$7.9212.47.4

BMY's other fair value metrics, such as price/sales, dividend yield, and various forms of cash flow, give it a wide fair value range and a harmonic average fair value that works out to 12.4X earnings.

But today BMY trades at 7.4X forward earnings, which makes it an anti-bubble Buffett blue-chip.

What's an anti-bubble stock? According to Ben Graham, it's a company trading at 8.5X or fewer earnings or cash flow, and thus pricing in zero or even negative growth. In the case of BMY, the Graham/Dodd fair value formula estimates it's priced for -2.2% CAGR growth.

Such blue chips are the ultimate Buffett-style "fat pitch" because it's literally impossible to lose money over the long-term as long as they grow at zero or faster.

That assumes of course, that you use prudent risk management and avoid becoming a forced seller for emotional or financial reasons.

What is BMY's growth outlook? For context, Moody's estimates that over time big Pharma's earnings will grow at 4% CAGR.

What about BMY?

BMY Long-Term Growth Outlook

(Source: FactSet Research Terminal)

  • 5.5% to 6.7% CAGR growth consensus range

  • smoothing for outliers margins of error are 10% to the downside and 20% to the upside.
  • 4% to 9% CAGR adjusted growth consensus range

BMY is NOT a dying company, but one that's strong drug pipeline and exceptional management is expected to drive above-average growth.

What does that mean for potential returns in the next few years?

Analyst Median 12-Month Price Target

Morningstar Fair Value Estimate

$75.26$68 (DCF model = 8.6X earnings, 91% likely to be too conservative)

Discount To Price Target (Not A Fair Value Estimate)

Discount To Fair Value

22.55%14.28%

Upside To Price Target (Not Including Dividend)

Upside To Fair Value (Not Including Dividend)

29.11%16.66%

12-Month Median Total Return Price (Including Dividend)

Fair Value + 12-Month Dividend

$77.22$69.96

Discount To Total Price Target (Not A Fair Value Estimate)

Discount To Fair Value + 12-Month Dividend

24.51%16.68%

Upside To Price Target ( Including Dividend)

Upside To Fair Value + Dividend

32.48%20.02%

Analysts are very bullish on BMY expecting 32% total returns over the next year, almost 3X that of the S&P 500.

Morningstar's very questionable fair value estimate of just 8.6X earnings still shows a 20% upside to fair value.

We don't actually care about 12-month price targets, which never have any basis in our recommendations.

Time Frame (Years)

Total Returns Explained By Fundamentals/Valuations

1 Day0.02%
1 month0.4%
3 month1.25%
6 months2.5%
15%
216%
325%
433%
541%
649%
757%
866%
974%
1082%
11+90% to 91%

(Sources: DK S&P 500 Valuation And Total Return Potential Tool, JPMorgan, Bank of America, Princeton, RIA)

  • over 12 months luck is 20X as powerful as fundamentals
  • over 11+ years fundamentals are 11X as powerful as luck

So what's BMY's return potential for the next few years based purely on a return to historical fair value?

BMY 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

BMY goes through very long cycles of being undervalued and overvalued.

In mid-2016 it traded at over 30X earnings. Just three years later its forward PE fell to less than 7.

What if BMY merely returns to its average fair value, which works out to a PE of 12.4?

BMY 2023 Consensus Total Return Potential (12.4 Average Historical Fair Value)

(Source: FAST Graphs, FactSet Research)

Then investors would still nearly double their money and earn Buffett-like returns from this blue-chip bargain hiding in plain sight.

OK so the growth through 2023 is strong and the return potential is excellent.

But what about beyond 2023, maybe the market is discounting BMY due to horrible patent cliffs?

Metric2021 Growth Consensus2022 Growth Consensus2023 Growth Consensus (Humira Patent Cliff)2024 Growth Consensus2025 Growth Consensus

2026 Growth Consensus

Sales9%4%3%3%0%-7%
Dividend9%5%4%10%4%

-6% (likely data artifact)

EPS16%7%4%2%-1%-11%
Owner Earnings (Buffett Smoothed Out FCF)-15%1%NANANANA
Operating Cash Flow22%13%8%8%NANA
Free Cash Flow24%6%17%NANANA
EBITDA65%-8%5%5%NANA
EBIT (operating income)346%5%3%3%NANA

(Source: FAST Graphs, FactSet Research)

Like all pharmas BMY has patent cliffs that result in some years of slow or even negative growth. For BMY those start in 2022 and peak in 2026.

How does that change the medium-term outlook?

BMY 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

Even factoring in the patent cliffs, a return to historical mid-range PE would see BMY nearly triple in value, delivering Buffett-like 22% CAGR returns for the next five years.

That's 6X the return consensus potential of the S&P 500.

BMY 2026 Consensus Total Return Potential (12.4 Average Historical Fair Value)

(Source: FAST Graphs, FactSet Research)

If BMY returns to 12.4X earnings you still nearly double your money.

BMY Investment Decision Score

TickerBMYDK Quality Rating1168%Investment GradeA+
SectorHealthcareSafety468%Investment Score100%
IndustryPharmaceuticalsDependability468%5-Year Dividend Return20.96%
Sub-IndustryPharmaceuticalsBusiness Model3
Today's 5+ Year Risk-Adjusted Expected Return16.47%
SWAN, Phoenix, Top Buy, Strong ESG
GoalScoresScaleInterpretation
Valuation4Very Strong BuyBMY's 40.63% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital7ExcellentBMY's credit rating of A+ implies a 0.60% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital10ExceptionalBMY's 20.96% vs. the S&P's 8.79% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score
Return on Capital10ExceptionalBMY's 16.47% vs. the S&P's 3.39% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score31Max score of 31

S&P's Score
Investment Score100%

Exceptional



73/100 = C(Market Average)
Investment Letter GradeA+



(Source: DK Automated Investment Decision Tool)

BMY offers more than 4X the market's 5-year risk-adjusted expected return. And even if you use the average 12.4 fair value PE then its 9.5% CAGR risk-adjusted expected return is nearly 3X that of the S&P 500.

For a safe 3.4% yield, being able to make 3 to 4X the market's likely returns is a very enticing proposition.

In fact, it's why this SWAN pharma giant is as close to a perfect anti-bubble Buffett "fat pitch" bargain as exists on Wall Street today.

That's assuming you're comfortable with the risk profile.

Risk Profile: Why Bristol Isn't Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

BMY's Risk Profile Includes

  • political/regulatory risk (US and international) includes drug pricing and reimbursement for Medicare/Medicaid
  • M&A execution risk - one of the most M&A intensive industries on earth
  • patent cliffs
  • litigation risk: if drugs harm consumers later
  • drug development/approval risk
  • market share risk (over 1,000 major competitors)
  • margin compression risk from generics/biosimilars (eventually expected to be 90% of the market)
  • talent retention risk
  • supply chain disruption risk (causing havoc globally right now)
  • currency risk

BMY Long-Term Risk Management Consensus

Rating AgencyIndustry Percentile

Rating Agency Classification

MSCI 37 Metric Model85.0%

A, above-average

Morningstar/Sustainalytics 20 Metric Model93.0%

22.4/100 Medium-Risk

Reuters'/Refinitiv 500+ Metric Model94.9%Excellent
S&P 1,000+ Metric Model33.0%Below-Average
Just Capital 19 Metric Model84.3%Excellent
Consensus78.0%Good
FactSet Qualitative AssessmentBelow-AverageNegative Trend

(Sources: MSCI, Morningstar, Reuters', S&P, Just Capital FactSet Research)

BMY's Long-Term Risk Management Is The 65th Best In The Master List (80th Percentile)

(Source: DK Master List) - 5 non-rated companies mean BTI is in 41st place

BMY's risk-management consensus is similar to that of such dividend aristocrats and kings as KMB, TROW, PM, and FRT.

All companies have risks but few are as skilled at managing them as BMY.

How We Monitor BMY's Risk Profile

  • 21 analysts
  • 2 credit rating agencies
  • 7 total risk rating agencies
  • 28 experts who collectively know this business better than anyone other than management

When the facts change, I change my mind. What do you do sir?" - John Maynard Keynes

There are no sacred cows at Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math retiring rich and staying rich in retirement.

Bottom Line: Bristol Myers Is The Best Buffet Blue-Chip Bargain You Can Buy Today

I know that many BMY investors are frustrated with how long this blue-chip has been hated by Wall Street. This is where historical context is important.

BMY Historical Correction Context Since 1986

(Source: Portfolio Visualizer)

This current correction is the 7th worst BMY has seen in 35 years.

Other than the tech bubble crash when BMY crashed almost 70% after becoming 150% overvalued, BMY's bear markets tend to last 5 years or less.

The point is that being a long-term BMY investor requires patience, as it does for all blue-chips.

I can't tell you when BMY will return to fair value, only that it eventually will. In fact, I can virtually guarantee that one day BMY will fly off into another bubble, trading at a PE of 25, 30, or even more.

If you're comfortable with the pharma risk profile and looking for the best Buffett blue-chip bargain on Wall Street, then consider Bristol Myers.

No long-term investor in history has ever paid 7.4X earnings for Bristol and lived to regret it. And based on the expert consensus from the 28 analysts and rating agencies that know this company best, this time isn't likely to be the first.

 
 




 


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