While growth stocks boomed in the era of easy money, value stocks have returned to form as the market's top performers in the current high interest rate environment. Now, value comes in many forms, such as a highly dependable dividend, an economically insensitive revenue stream, the quality of a company's management team, long-term growth drivers, and/or an attractive valuation.
In the present risk-averse market, the most highly prized aspects of value stocks appear to be the dependability of a company's dividend, along with its ability to generate strong free cash flows regardless of the state of the broader economy.
Nowhere is this patten more evident than in the realm of big pharma stocks. Global pharmaceutical companies have historically been attractive value plays due to the resiliency of their revenue streams, the built-in pricing power that comes with their enormous scale, and their proven ability to return cash to loyal shareholders via generous dividend programs.
As two elite drugmakers with sustainable dividends and recession-proof business models, Eli Lilly (LLY -0.15%) and Bristol Myers Squibb (BMY -0.35%) are both poised to benefit from this hard pivot to value. Which of these big pharma stocks is the better value play right now? Let's dig deeper to find out.
The case for Eli Lilly
Lilly is a classic comeback story. During the first part of the last decade, Lilly had to deal with the loss of exclusivity for multiple top-selling medications, such as the antipsychotic Zyprexa, the antidepressant Cymbalta, and the diabetes drug Humalog, among others. By investing heavily in both internal and external pipeline opportunities, Lilly has definitively moved beyond these patent headwinds via the advent of a slew of new growth products, which has been a boon for its share price in recent times.
Since losing patent protection for some of its most iconic drugs, for instance, Lilly has successfully developed and subsequently brought to market major drugs such as the breast cancer treatment Verzenio, the cluster headache medicine Emgality, and the diabetes therapy Mounjaro. The net result is that Lilly's earnings have skyrocketed over the prior nine years:
The best may be yet to come, however. Lilly is widely expected to grab a weight loss indication for Mounjaro before year's end, which may push its peak sales beyond $25 billion, according to multiple analysts. What's more, Lilly's late-stage Alzheimer's disease candidate, donanemab, also has a real shot at generating mega-blockbuster sales (greater than $5 billion annually) by decade's end.
What about Lilly's valuation? One knock against this big pharma stock is that it might be overvalued at current levels. Lilly's shares are presently trading at over 38 times forward earnings, after all. However, this valuation concern might be wildly overblown.
An arguably better way to evaluate value in this case is through the forward-looking earnings yield. Wall Street's consensus forward-looking earnings yield of 3.49% for this big pharma stock is only modestly higher than the current yield of the 10-year Treasury note, implying that Lilly's stock is probably fairly valued, relative to a risk-free asset.
But if we push this forecast out another year to 2025 to factor in potential sales from just Mounjaro's pending weight loss indication, Lilly's earnings yield could realistically gap up to 4.48% (all else being equal). In that case, Lilly's stock would be in solid bargain territory right now.
Wall Street, for its part, seems to side with this bargain scenario. After all, the consensus take among analysts covering the stock calls for Lilly's shares to appreciate by a healthy 13.7% over the next 12 months.
The case for Bristol Myers Squibb
BMS is quickly turning into a battleground stock. The company's loss of exclusivity for the blood cancer drug Revlimid has already started to outpace gains from new product launches, and the upcoming patent expires for blood thinner Eliquis and cancer immunotherapy Opdivo could weigh heavily on earnings later on in the decade.
Management has argued that a host of new growth products such as cardiovascular drug Camzyos, cancer drug Opdualag, hematology treatments Reblozyl, Abecma, and Breyanzi, along with immunology drugs Sotyktu and Zeposia, should more than offset these losses. Not all Wall Street analysts agree with management's optimistic take, however.
Morningstar analyst Damien Conover, CFA, for instance, thinks the drugmaker still has more work to do to shore up its earnings potential over the period from 2025 to 2030. In other words, BMS may have to pull the trigger on additional business development deals to overcome these patent headwinds; although it is important to note that the drugmaker already sports one of the deepest and most robust clinical pipelines in the industry as currently constructed.
This less-than-encouraging take, though, does appear to be the core reason Bristol's shares have abruptly reversed course after a market-crushing performance in 2022.
How does BMS stack up on the valuation front? BMS stock screens as "significantly undervalued" with a 11.9% forward-looking earnings yield. This sky-high earnings yield also dovetails with Wall Street's notable consensus 12-month price target, which implies an upside potential of 19.1% from current levels.
On paper, BMS stock is easily the better bargain. But that doesn't mean BMS is a better value play than Lilly. Market sentiment, although impossible to properly quantify, is a missing component of this story.
Lilly is widely expected to be a growth machine for the remainder of the decade. BMS, on the other hand, is expected to generate low single-digit top-line growth over the course of the next two years, and then there are considerably more question marks about its long-term earnings potential compared to Lilly -- at least as things stand now.
As this moody market has shown zero patience for uncertainty, Lilly comes across as the more compelling value play in this head-to-head comparison.