Bristol Myers Squibb shares have climbed more than 17% this year even as analysts hold an average price target only a few dollars above the current share price. A discounted valuation, a well-funded dividend, and strong free cash flow are giving bulls three reasons to expect more upside, with a possible AstraZeneca acquisition as a wildcard.
Bristol Myers Squibb has risen more than 17% so far this year. Yet analysts remain cautious, with an average price target of $66.71, just over $3 above the current trading price. The bear case centers on patent expirations facing top sellers Eliquis and Opdivo. However, the company's growth portfolio and cash generation are giving the bull case more weight.
A discount to its pharmaceutical peers
The company is coming off a strong second quarter, in which it reported revenue of $12.9 billion, up 6% year over year. It also posted earnings per share of $1.62, up 153% from a year earlier. Despite that performance, the stock trades at less than 10 times forward earnings and less than 14 times trailing earnings, a discount to mega-cap peers including AbbVie, AstraZeneca, Merck, Johnson & Johnson, Pfizer, and Roche.
That gap suggests the market has overly discounted the stock relative to its more than $11 billion in annual free cash flow. Growth drugs including Opdivo, Qvantig, Cobeyta, Camzyos, Reblozyl, Breyanzi, and Opdualag now account for nearly 60% of total revenue and grew 15% year over year in the second quarter. Combined with pipeline candidates such as blood thinner Milvexian, that expansion gives the company a runway to fill the revenue gap left by its aging top sellers.
A dividend built on decades of payouts
The company has paid a dividend for 94 consecutive years and raised it for the past 17. This year's payout included a 1.6% increase to $0.63 per share, which lifted the yield to 3.95% at current prices, more than three times the average S&P 500 yield. A payout ratio of around 44% of trailing free cash flow keeps that dividend well supported. The company is also returning cash through a $5 billion stock repurchase plan.
Cash generation and a merger wildcard
The company continues to beat quarterly earnings and revenue expectations, and delivered more than $3 billion in free cash flow in the second quarter. That cash generation lets management fund late-stage research, pursue bolt-on acquisitions, and pay down debt at the same time.
One wildcard that could push the stock higher is an acquisition. According to reports, AstraZeneca and Bristol Myers Squibb held merger talks valuing the company at $400 billion. If that deal went through, Bristol Myers Squibb would see its shares jump as the buyout candidate, though such a mega-merger would likely face stiff regulatory scrutiny.
Like AbbVie a few years ago, the company appears poised to offset revenue lost to its legacy drugs with its newer therapies, a likelihood that has not yet been fully priced into the stock.
Source: Fool
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