BMYMP - Bristol Myers Squibb: The Gift Has Arrived

2023-07-23 01:07:37 ET

Summary

• Bristol-Myers Squibb is expected to report its Q2 results on July 27, with market sentiments highly pessimistic, heading into its earnings release.
• The company faces revenue challenges due to the loss of exclusivity for Revlimid. I gleaned that the market has likely reflected significant headwinds on BMY's ability to recover.
• BMY's sentiments have likely reached peak pessimism, auguring well for its upcoming earnings. Analysts are also pessimistic, lowering the bar for BMY to clear.
• Dip buyers have also returned this week, defending BMY's critical support levels, providing more confidence for holders to add more shares.
• I see an exceptional opportunity for BMY holders to buy against the tide now; Strong Buy.

Bristol Myers Squibb Company, or BMS (BMY), is slated to report its highly anticipated second quarter or FQ2 earnings release on July 27. Based on how the market operators have positioned BMY's investing sentiments heading into its report card, they likely aren't optimistic.

Accordingly, BMY nearly re-tested lows last seen in late January 2022, even as the S&P 500 ( SPX ) ( SPY ) continued to power higher. BMY has also underperformed its healthcare sector peers ( XLV ) since topping out in June 2022.

However, the good news is I also noted a robust bullish reversal this week, suggesting that dip buyers likely saw attractive value in BMY, given its battering.

The leading biopharma company is also in the midst of a leadership transition as CEO Giovanni Caforio looks to hand over the helm to his commercial chief Chris Boerner. It's also navigating the generic erosion from the loss of exclusivity or LOE related to Revlimid, which saw a substantial 37% YoY decline in revenue in the first quarter.

Given Revlimid's significant contribution to the company's revenue profile (15.4% of total Q1 product revenue), the headwinds would likely linger longer. Despite that, management was confident at its Q1 earnings call about Revlimid's revenue contribution for FY23, maintaining its $6.5B guidance. However, it still represents a significant decline of 35% from FY22's contribution. As such, I believe while the market isn't surprised by the LOE headwinds, they are likely reflecting the execution risks from BMY's other product revenue, expected to mitigate Revlimid's LOE.

Investors are urged to assess whether the company could maintain its 2% revenue growth guidance for FY23. The revised consensus estimates suggest analysts are pessimistic about the company's guidance, as they penciled in a 1% topline growth this year.

In addition, BMS is expected to be hobbled by revenue growth challenges through the FY27 forecast period. Accordingly, analysts expect a revenue CAGR of just 0.7% from FY22-27, which could suggest why BMY trades at a discount against its biopharma peers' median multiple. As such, I believe the hammering in BMY from its June 2022 highs is necessary to reflect these headwinds, despite the prospects from the company's in-line and new products portfolio.

Notwithstanding, I believe that some of the best investment opportunities exist when investors' psychology is at its most pessimistic. As an aside, I highlighted to members of my service on 21 October 2022 that the S&P 500 formed a significant bottom. However, Bloomberg Economics noted in the same week that the " chance of recession [is] 100% in the next 12 months," likely spooking investors into selling their shares at the market's bottom. Therefore, investors who discerned price action signals unveiling significant clues into the market's psychology likely avoided selling their shares at the lows late last year while adding aggressively.

BMY last traded at a forward EBITDA multiple of 8.1x, well below its 10Y average of 14.1x. However, I think the market is right to de-rate BMY, given its execution risks of mitigating the losses from Revlimid, as seen in the tepid revenue growth projections from Wall Street analysts through FY27.

Moreover, income investors could also have lost interest in supporting the recent BMY decline, as it last traded at a forward dividend yield of 3.6%. It's well below the 2Y Treasury yield, which last printed at 4.85%. As such, the critical question facing investors is whether the discount has substantially reflected its challenges? And if so, did we observe more robust buying sentiments that could help BMY bottom out moving ahead?

BMY formed a robust bullish reversal last week, nearly taking out its late January 2022 lows. Also, the turnaround is very close to its critical 200-week moving average or MA support level (purple line), indicating that value investors likely gleaned an attractive opportunity to add exposure.

Note the previous instances in March 2020 and November 2021 when BMY formed its bullish reversal close to the 200-week MA levels; buying sentiments returned with a vengeance. It suggests dip buyers likely waited patiently for the selling pressure to force out weak holders to bail out at critical turning points before returning to defend.

Could the current level demonstrate similar buying momentum as we observed previously? I have the conviction that the risk/reward levels are highly attractive, as seen in BMY's valuation. The company is also still expected to retain its highly profitable business model through FY27, with EBITDA margins close to 40%. Its R&D pipeline remains robust, corroborated by its wide economic moat, giving it substantial scale and R&D capabilities to stretch its leadership further.

As such, BMY holders looking for a solid opportunity to buy more shouldn't miss the current levels.

Rating: Strong Buy.

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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