Summary
- BMY just posted solid Q2 results which included double-digit top- and bottom-line growth.
- The company trades for just 10x earnings and offers a safe, 3.6% dividend yield.
- The Celgene acquisition appears to be on track, and this move should add further gains to the company's bottom line in the near-term.
- This idea was discussed in more depth with members of my private investing community, The Dividend Growth Club . Start your free trial today »
It's fairly rare that I pound the table for a specific stock because I'm happy to acknowledge that the market is unpredictable, and there are no sure things in the equity space. However, from time to time I see value that is so compelling that I can't help but hype up a potential investment opportunity. To me, Bristol-Myers Squibb (BMY) falls into that category at the moment.
In the mid-$40s, I think BMY is probably the best value that I see in the market today. To me, this is a blue chip name that has been irrationally beaten down to valuation levels that simply don't make sense when you compare them to the stock's current fundamentals and growth outlook. I've put my money where my mouth is with regard to BMY, going overweight the stock on recent weakness. Like I said before, there is no such thing as a risk-free bet in the stock market, but to me, BMY is a high-conviction play that has the potential to result in strong, double-digit total returns.
Q2 Results
First things first, let's begin with a breakdown of the recent Q2 results.
Admittedly, I was nervous headed into this report. Sentiment has been pretty negative when it comes to BMY ever since the Celgene (CELG) deal was announced and BMY was trading weakly into earnings. I continue to be bullish on that deal. I think it will solidify BMY's status as a world leader in the oncology space. As management noted in its letter to shareholders after the deal was announced, the combined company will be #1 in the world in oncology and cardiovascular sales and top-5 when it comes to big sales markets inflammation and immunology. Management also noted that the deal will be accretive right away. Management expects to see 40% EPS accretion in year 1 and 10% accretion per year after that until 2025. In other words, the Celgene deal is expected to result in much higher EPS. This plays a big role in my bull case because shares are already very cheap of a price-to-earnings basis as it is.
This nervousness was also brought on by the fact that BMY released disappointing first-line lung cancer data the night before it posted earnings which caused a sell-off after hours. Management called the trial successful, yet it didn't meet all of its primary end points. This led to a market sell-off (likely driven by algorithms which focused in on the totality of the trial rather than the minute details). BMY CEO Giovanni Caforio commented on this trial at the start of the Q2 conference call saying:
"Starting with the results of Part 1a, this is the third major tumor in which Opdivo+Yervoy shows an overall survival benefit in the first-line setting. And we believe these results represent a potentially differentiated opportunity in first-line lung cancer. If approved, the combination would provide an additional and chemo-sparing treatment option for patients. And I have full confidence in my commercial team's ability to execute in this competitive marketplace."
Prior to the Q2 results being posted, I assumed that the market would be happy to pile on negative momentum and push the ~4% AH sell-off to the ~10% range if the earnings weren't good. For a while, the ~$45 range has served as fairly strong support for BMY. But the lung cancer data pushed it well below that in the after-hours trade and I thought that there was a chance shares would hit $40 in the near-term. However, all of these concerns were proven unnecessary when the company reported another strong earnings report. On Thursday morning, when the market opened, the -4% move from the night before had been totally erased and shares were in the green, up ~5%.
