Bristol Myers (NYSE:BMY) is a name we consider to be one of our more interesting Compounders today. It is not a high growth name going forward, but it's hard to ignore their track record: BMY has compounded EPS at an impressive 18% from 2014 to 2019, and grew EPS by over 50% in 2020 due to accretion from the Celgene deal.
Back in August we discussed our view on valuation, comps, projections, and also provided a detailed drug by drug analysis.
Since our initial recommendation 16 months ago (August 16, 2019), BMY is up 44% including dividends (vs 31% for the S&P). Yet, it continues to trade at only 8.8x this year’s earnings and has been a laggard of late.
At a conference last Fall, one analyst suggested that Bristol Myers provide long term revenue and earnings guidance, as 2021 guidance alone seems insufficient. We agreed, especially given the expiration of revlimid, Orencia and Pomalyst (in 2026, 2022 and 2024 respectively).
Fortunately, management complied at the JPM Healthcare Conference. They offered investors a long term forecast of 3.7% revenue growth from 2020 to 2025, which we viewed as positive given the fears surrounding what happens to revlimid beyond 2023.
With share buybacks likely in the 2.5% to 3.0% range annually, assuming steady margins, then EPS growth big picture should range between 5.2% and 6.7% annually. Not bad for a non-cyclical that trades at under 9x cash earnings and does well over 40% operating margins.
Here is their long term forecast:
Revlimid is an position: absolute;1BB revenue franchise, and at 26% of revenue, an overhang on the stock as patent protection begins to fall away starting in 2023. Revlimid has zero IP protection after 2026. As a non-complex molecule, it is likely to see hefty generic competition.
Other drugs making up another 20% of revenue look set to expire in the coming years as well.
The analogy to me is Pfizer (PFE), which in 2012 faced patent expiration from its blockbuster drug Lipitor. Greenlight’s Pfizer purchases in 2011 led me to also buy shares at the time. And while revenue actually dropped from $65BB to $55BB in 2012 at PFE, EPS remained flat at position: absolute;.63. The stock re-rated from 10x to 14x over the next 2 years.
Pfizer was a 50%+ gainer in a couple years, as (despite revenue continuing to fall) EPS grew 8% in 2014. The key was that they generated tons of free cash flow, which they used to purchase new medicines as well as boatloads of shares.
Today, PFE still trades at 12x earnings, probably the “right” multiple given its low growth expectations. Pfizer will over-earn a bit in 2021 too, as its Covid-19 vaccine is far more problematic than AstraZeneca’s or Johnson & Johnson's (which don’t require specialized freezers, and only require one dose).
Bristol appears in far better shape today than PFE in 2012, and yet trades at a bigger discount. PFE traded below 10x only temporarily back in 2012, but eventually re-rated to 12-14x.
With a huge pipeline of drugs under development at BMY, 50 assets in total, there is unrisked revenue potential of $20-25BB. With FCF we expect continued tuck-in acquisitions too.
BMY probably should fetch a PFE 12x type multiple. With $7.30 in EPS guidance this year, that puts BMY fair value at roughly $90 per share with dividends.
Bristol also announced at the conference that with the expiration of their CVR (Contingent Value Right), they were upping their share repurchase plan by $2BB. Likely they will buy back $3-4BB of stock in 2021.
That should offer continued support technically speaking.
Here is a summary of revenue potential:
Management guided to 3.7% revenue growth over the next five years. We assumed 3.6%. A lot of this is front end loaded. Operating Margins are also expected to be in the low to mid 40’s. We assumed 44%, and falling to 43%.
This takes EPS From $7.65 in 2021 (perhaps a tad high), to $9.19 in 2025.
While obviously impossible to predict which drugs will be approved, and when exactly, there are a lot of "shots on goal" here. Management has a good track record of beating guidance too. I would not be surprised to see position: absolute;0 in EPS by 2025. In fact, over the past 40 quarters, management has only missed 3 times, but by very small amounts (3c, 1c, 2c).
In 2025, should BMY only trade to a 10x multiple, then with dividends the shares would still return 12% per year over the next 5 years. That is a cumulative return of 72%.
Our downside scenario is 8x $7 in EPS in a year, assuming a worst case multiple, as well as a big earnings miss. With a position: absolute;.96 annual dividend, that is down $7, and upside of $25 per share. It is pretty tough in this market to find risk reward ratios this attractive.
Companies like BMY, which generate massive amounts of free cash, will have numerous options for deploying capital. From 2021 to 2023, total FCF guidance is $45-50BB.
Their balance sheet is in excellent shape too (A rated). Proforma for the MyoKardia deal, debt/EBITDA is solid at only 1.7x net of cash.
Bristol is far from being a sexy stock. It has been stuck for the past year in the low 60's/high 50's, as drug pricing concerns, and growth/vaccine focused stocks have grabbed investors' attention.
But with dividends, buybacks, good management, and a big R&D pipeline, the prospects look solid. Their slides here go into detail on lots of drug candidates. Of their 50 pipeline assets, 20 will be decided in the next 2 years.
Any number of approvals could be a catalyst for further stock gains.
Even should Congress reduce Medicare Part B drug prices, then BMY appears priced for the worst.