With the market at an all-time high, an investor would be hard-pressed to find a stock trading at an earnings multiple that's less than its growth rate while sporting a dividend yield close to 3%. But Bristol Myers Squibb (NYSE:BMY) is such a stock. With its recent acquisition of Celgene, Bristol is in the process of creating a cash-generating machine that should merit a higher valuation and reverse its underperformance in 2019.
Refocusing the portfolio
Bristol-Myers Squibb has steadily refined its pharmaceutical portfolio over the years through a series of acquisitions, divestments, and alliances. The company now focuses largely on immuno-oncology but divides its business into four broad therapeutic areas: oncology, immunoscience, cardiovascular, and fibrotic diseases. As of January 2019, Bristol had five drugs generating over $1 billion in revenue annually, with the two most prominent being Opdivo (with revenue up 36% in 2018 to $6.7 billion) and Eliquis (with revenue up 32% to $6.4 billion).
Morningstar estimates that more than half of Bristol's late-stage pipeline focuses on immunology and cancer indications. This is significant, as this is an area where the FDA aggressively approves drugs and one that commands strong pricing power -- important in an industry where governments and private payers are increasingly pushing back on drug costs.
Betting the ranch
Bristol's acquisition of Celgene will further reinforce these strengths and cement its leadership in immuno-oncology. Approximately 90% of Celgene's revenue is in hematology. Management has suggested that the combined entity would have six near-term product launches with potential revenue generation of $15 billion.
This, combined with potential cost synergies, should make the acquisition immediately accretive, with Morgan Stanley estimating a 44% increase in earnings per share (EPS) in 2020 and an additional 60% increase in 2021. With this earnings growth, Bristol would trade at around nine times 2020 earnings and 7.5 times 2021 earnings -- a bargain in a market which is trading at 17 times forward earnings.
The Celgene acquisition is not without risk, however. To fund it, Bristol is incurring additional debt of $39 billion. As a result, Moody's and S&P placed Bristol on credit watch for a possible downgrade following the acquisition announcement. However, the combined entity should be able to generate $60 billion in cash flow over the four-year period from 2020 to 2023, which should allow for substantial deleveraging as well as funding steady dividend increases.
Quite a few pharmaceutical stocks are priced at premiums right not. With its shares trading at a price to earnings multiple less than its medium-term growth rate, Bristol-Myers Squibb provides meaningful value in a market where value is increasingly in short supply.