Has Bristol-Myers Squibb Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Bristol-Myers Squibb (NYSE: BMY  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Bristol-Myers Squibb.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

2.4%

Fail

 

1-year revenue growth > 12%

(17.1%)

Fail

Margins

Gross margin > 35%

75.5%

Pass

 

Net margin > 15%

11.1%

Fail

Balance sheet

Debt to equity < 50%

54.2%

Fail

 

Current ratio > 1.3

1.15

Fail

Opportunities

Return on equity > 15%

17%

Pass

Valuation

Normalized P/E < 20

24.09

Fail

Dividends

Current yield > 2%

3.7%

Pass

 

5-year dividend growth > 10%

3.6%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Bristol-Myers Squibb last year, the company has seen its score plunge by four points, with substantial declines in margins and earnings leading to a higher valuation multiple, as well as worse performance on its balance sheet. Yet the stock has risen 15% over the past year.

Like so many big pharma companies, Bristol has suffered from patent expirations recently. The loss of patent protection on its blockbuster drug Plavix led to the big decline in overall revenue the company has seen over the past year, with sales of the drug falling by $4.5 billion. The company also has other drugs coming off patent soon, including Baraclude this year and Abilify and Sustiva in 2015.

The key to Bristol's future is its pipeline, but there too, the company has faced problems. Bristol spent $2.5 billion early last year to buy hepatitis-C specialist Inhibitex despite its lead drug having only gotten through phase 1 trials. Yet it had to write down $1.8 billion of its investment less than a year later after a patient died using the drug, leading to Bristol's decision to shut down development on the drug entirely. An unrelated drug recall and allegations of executive insider trading also distracted from Bristol's attempts at making progress on its pipeline.

Still, the company hasn't gone without success. Bristol and partner AstraZeneca (NYSE: AZN  ) managed to get the type 2 diabetes treatment Forxiga approved for use in Europe, which could help it recover at least part of the lost sales from Plavix. Moreover, the approval of Eliquis, which Bristol developed with Pfizer (NYSE: PFE  ) , for atrial fibrillation could become a blockbuster for Bristol, which could get not only half the profits but also $750 million in milestone payments if it's successful.

For Bristol to improve, it needs to get past its revenue losses from Plavix and work on getting its finances back in order after the Inhibitex fiasco. If it can find success from its stable of drugs, then Bristol should get at least somewhat closer to perfection in the next year.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Bristol-Myers Squibb to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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