OGN - Don't Let The Market Fool You: Bristol-Myers Is Not A Value Trap
2024-07-17 10:00:00 ET
Summary
- Bristol-Myers Squibb stock has performed poorly and analysts have started to downgrade its rating citing a 'value trap'.
- Value traps have all shared a similar set of problems, which don't apply to Bristol-Myers Squibb.
- The company is facing a steep patent cliff with seven main drugs losing exclusivity in two years, but new growth portfolio is set to straighten it out.
- Despite no revenue growth, Bristol-Myers remains a solid company with a strong balance sheet, thanks to its FCF generation ability.
- BMY offers cheap 6x forward P/E valuation and 5.9% dividend yield, which is a great ground for rebound.
Introduction
In my latest article, I reviewed the prospects of struggling Pfizer ( PFE ) and explained why the patent expiration fears are overblown, and the market underestimates the company's ambitions in launching new drugs. Well, it's not hard to make the same case for Bristol-Myers Squibb ( BMY ). An upcoming LOE (loss of exclusivity) cliff and competitive pressure risks prevail for now but the "growth" portfolio and sliding valuation should create a solid ground for a rebound.
As always, falling stock price resulted in analysts downgrading the company's rating, mainly citing a "value trap" due to slow revenue growth rates. I believe this thesis is distorted, and the turnaround story is much simpler than that as Bristol-Myers has a quality cash-generating pharma business that should only become stronger from the long-term perspective.
What is a value trap, really?
Originally, opportunities in the stock market are called 'value traps' when low valuations today come at the cost of a struggling business model tomorrow. We've seen multiple examples of such traps throughout history, and all of them shared a similar set of problems:
- Burdensome balance sheet. The company might get cheap simply because high debt burns down a significant part of shareholder's value or heavy investments with no meaningful returns lower cash flow potential.
- Structural changes in the industry. The market would take into account any signs of the company's products starting to lose competitive advantage, since that narrows the moat and overall market share.
- Dividend trap. The firm's current dividend yield might be high, but if there are signs of dividend cuts in the future, that should be priced in.
- Rapidly shrinking profitability with no clear management plan to reverse the trend