Bristol-Myers Squibb: Don’t Celebrate Too Soon (Downgrade) (NYSE:BMY)

BMY: The outperformance shouldn’t have surprised you

Bristol-Myers Squibb Company (NYSE:BMY) investors have had a lot to celebrate recentlyas stocks continued to outperform the S&P 500 (SPX) (SPY). Despite the sharp pullback suffered by investors this week as the market sold off, BMY remains nearly 20% higher since my previous mid-July 2024 update.

In my bullish BMY article, I highlighted the company’s execution risks and tepid outlook as contributing to its pessimism. However, we also reminded investors that BMY’s valuation was very attractive. Additionally, it has managed to constructively consolidate above a critical support level, improving my confidence that income and value investors may come back more aggressively.

BMY: Improved 2024 guidance boosts confidence

Bristol-Myers Squibb’s Q2 earnings release for the end of July 2024 demonstrated why investors were too pessimistic as the company unveiled its revised guidance for 2024. The company’s ability to telegraph a clearer near-term outlook underscores increased visibility and reduced execution risks, even as BMY navigates its ability to break the patent cliff by 2030 .

Additionally, the biopharma major has experienced solid valuations across its growth portfolio, suggesting that all is not lost as it moves away from its legacy products. As a result, BMY posted an 18% increase in revenue in the second quarter. In particular, growth products accounted for 46% of the company’s total portfolio, supporting the improved outlook. As a result, it should improve market confidence in its execution over the next few years as the company works on “transformational medicines where (BMY has) a competitive advantage.”

Therefore, we should expect the company to continue to demonstrate solid pipeline progress as it can “discontinue programs” that are not meeting their ROI metrics. In a recent conference call, Bristol-Myers Squibb is confident that its growth portfolio could “exceed 50%” of its total business next year. Therefore, I think it is increasingly clear that the market is correct in its assessment of reduced execution risks as BMY develops its long-term guidance.

There are valid concerns about the revised Medicare drug prices for Eliquis. Based on the latest release, Wall Street does not anticipate a significant impact on the company’s performance. BMY also assured investors that Eliquis is expected to remain a critical anchor to its business and anticipates “no material impact to that product’s EPS” through LOE in 2028. It expects several new launches, including (KarXT), to support BMY’s growth portfolio. , helping to alleviate market concerns about LOE challenges.

BMY’s progress is expected to remain flat

Wall Street upgraded BMY’s estimates, supporting its recent rally as it outperformed the market. Despite this, revenue growth is expected to remain uncertain and uneven as it works through the transformation of its portfolio. Therefore, a further reassessment of the valuation could be challenging unless the company can telegraph much stronger guidance over the next few years.

Despite this, BMY’s focus on driving growth through more robust business execution is expected to keep its adjusted operating profitability high. BMY’s top profitability grade of ‘A+’ should boost investor confidence in its ability to make the necessary changes to improve its overall growth profile. Consequently, unless the market anticipates a substantial impact on its underlying profitability (which is not the case at this point), a further downgrade seems unlikely.

Is BMY stock a buy, sell or hold?

Consequently, BMY’s forward adjusted EBITDA multiple of 12.8x is slightly below the 10-year average of 13.1x. Therefore, the stock does not appear to be overvalued. Additionally, the stock’s relatively high dividend yield of 4.7% should attract income investors eager for fundamental biopharma activities as the Fed may cut interest rates. Therefore, we have not assessed the potentially significant downside risks to the valuation that could prevent the recent rally from the June 2024 lows.

As seen above, BMY has exited the fray after forming a long-term low in June 2024 above the $40 level. However, it should also be noted that the stock seems to lack decisive momentum to break above the $55 area (March highs).

Therefore, I assess that BMY will most likely consolidate over the next few quarters as the market reassess developments from its commercial launches and pipeline developments. Additionally, its long-term trend has weakened, suggesting investors need to be cautious with their equity allocation.

Given a more balanced assessment and a price action perspective on catalysts and its fundamental profile, we have determined that a Hold rating seems more appropriate for now.

Rating: Downgraded to Hold.

Important Note: Investors are reminded to do their due diligence and not to rely on the information provided as financial advice. Consider this article supplementing the necessary research. Please always apply independent thinking. Note that the rating is not intended to time a specific input/output at the time of writing, unless otherwise stated.

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