|BMY||Bristol Myers Squibb||$75.75|
BMY share valuation multiple
Bristol-Myers-Squibb’s low valuation at the end of 2021 stood out. BMY stock appeared significantly undervalued. Here’s what I said about the company at the end of 2021:
“We expect adjusted earnings per share of $7.48 for the year. This gives the company a price-to-earnings ratio of just 8.2 using the adjusted earnings per share forecast for fiscal 2021.
“We believe a conservative price-earnings ratio for Bristol-Myers Squibb is 13.5. This is by no means a high price-earnings ratio. The S&P 500 price-earnings ratio is 28 .7 for comparison.It should be noted that Bristol-Myers Squibb traded above a price-earnings ratio of 13.5 for much of the past decade, leading into 2020.
“If the company were to return to a price-earnings ratio of 13.5 from its current price-earnings ratio of just 7.9, investors would see gains of around 70%.”
Expanding valuation multiples are responsible for most of the gains in 2022 for Bristol-Myers Squibb stock. The company’s valuation multiple fell from 7.9 to 9.9, using our forecast earnings per share estimate for fiscal 2022 of $7.59.
The valuation multiple is up more than 25% in the first half of 2022 alone. Meanwhile, we expect only modest earnings per share growth in 2022, from $7.51 in the year 2021 to $7.59 in fiscal year 2022.
Although Bristol-Myers Squibb’s price-to-earnings ratio has increased significantly in 2022 so far, there is still plenty of room for further expansion in valuation multiples.
As mentioned above, the company is currently trading for a price to earnings ratio of 9.9. This is still a low price/earnings ratio, both historically for Bristol-Myers Squibb and relative to the S&P500 price/earnings ratio of 19.7.
The future of BMY shares
Our fair estimate of the price/earnings ratio for Bristol-Myers Squibb has not changed. Here is what I said on the subject in our initial recommendation on InvestorPlace:
“We think a conservative P/E ratio for Bristol-Myers Squibb is 13.5. This is by no means a high P/E ratio…
“It should be noted that Bristol-Myers Squibb traded above a price-earnings ratio of 13.5 for much of the past decade, leading into 2020.”
With a current P/E ratio of 9.9 and a target P/E ratio of 13.5, we believe Bristol-Myers Squibb still has 36% upside potential at current prices. The stock still looks reasonably undervalued.
Outside of valuation, Bristol-Myers Squibb is still a high quality company dividend share based on its 15 consecutive years of dividend increases and its established position in the healthcare sector.
And Bristol-Myers Squibb stock still has an above-average dividend yield of 2.8%. It’s not the enviable yield of more than 3% offered by the stock 6 months ago, but it is well above the 1.4% dividend yield of the S&P 500.
In addition to its low valuation and strong dividend yield, Bristol-Myers Squibb also has modest but positive growth expectations. The company is targeting adjusted earnings per share growth of 1.1% this year based on the midpoint of guidance. This growth is driven by excellent adjusted earnings per share growth of 17% in fiscal 2021. BMY’s adjusted EPS in 2011 was $2.28, representing a compound annual growth rate (CAGR) over 10 years of 12.7%.
Don’t worry about the patent cliff
I expect growth to slow in the coming years as the company’s blockbuster drug product Revlimid begins to lose patent protection this year. Indeed, patent cliff fears are likely the reason investors can buy Bristol-Myers Squibb shares at such a high price right now.
But fear-driven investors are missing the big picture from Bristol-Myers Squibb. The company’s management team expects low to mid-single digit revenue growth from 2020 to 2025. The company is not expected to contract, despite current fears.
Despite soaring prices in the first six months of 2022, I continue to believe that Bristol-Myers Squibb is both undervalued and a buy for investors looking for value, safety and dividends.
As of the date of publication, Ben Reynolds held a long position in BMY stock.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.