Bristol Meyers Squibb - A Fair Value Report

My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
Bristol-Myers Squibb is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of biopharmaceutical (drug) products. Listed competitors include AstraZeneca plc, Pfizer, Inc., and Roche Holding AG.

Recent Business Acquisitions
In November 2019, the company completed the Celgene acquisition. The acquisition is expected to create a biopharmaceutical company well positioned for sustained innovation and long-term growth and to address the needs of patients with cancer, inflammatory, immunologic or cardiovascular diseases through high-value innovative medicines and leading scientific capabilities. Each share of Celgene common stock was converted into a right to receive one share of BMS common stock and $50.00 in cash. Celgene shareholders also received one tradeable contingent value right (“CVR”) for each share of Celgene common stock representing the right to receive $9.00 in cash, subject to the achievement of future regulatory milestones. The aggregate cash paid in connection with the Celgene acquisition was $35.7 billion (or $24.6 billion net of cash acquired).

Recent Business Divestitures
In order to complete the Celgene acquisition, the company was required by the FTC to divest certain products. To allow the acquisition to close on a timely basis in light of concerns expressed by the FTC, Celgene entered into a purchase agreement with Amgen (Nasdaq: AMGN) in August 2019 under which Amgen would acquire the global rights to Otezla* (apremilast) for $13.4 billion in cash. In November 2019, the company completed the divestiture of Otezla* to Amgen.

Also during fiscal 2019, the company sold its UPSA consumer health business, including the shares of UPSA SAS and BMS’s assets and liabilities relating to the UPSA product portfolio, to Taisho Pharmaceutical Co., Ltd., and completed the divestiture of its oral solid, biologics and sterile product manufacturing and packaging facility in Anagni, Italy, to Catalent Inc.

Subsequent Events
There were no subsequent events between the company’s fiscal year end and the filing of its most recent 10-K.

Short-Term Target
My current short-term target for the stock is $61.59, with an initial trailing stop set at $59.36. With a recent price of $60.26, upward price movement will find resistance at $63.82, and again at $65.55, with final resistance found at $65.55. Downward price movement will find support at $58.56 and again at $57.30, with final support found at $54.28.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. Basis my current beta ratio for this stock of 0.73, my volatility adjustment to recent pricing is $22 per share, making my the volitility adjusted price $83.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Considering the company’s earnings, $1.10 per share came from sources unrelated to day to day operations and/or from income tax benefits.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 66.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 169 shares of stock with a cost basis of $59.03 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $63.73 per share. During that holding period you would have collected $250 in regular and special dividends, and your initial $10K investment would have returned to you $10,796 a gain of 8% excluding regular and special dividends.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 3.44%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 208 insider trades involving 1,880,860 shares of stock. Of those 208 insider trades, 112 were Buys involving 1,093,858 shares of stock, and 96 were Sells involving 787,002 shares of stock, creating an insider buy to sell ratio of 41 to 1.4 to 1..

Prior Average Valuations
My average valuation for the prior five year fiscal period was $29. The stock price during that time period averaged $60, earnings averaged $1.24 per share, and the average PE Ratio was 48. The current PE Ratio is 25.

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $74 and my equity value (market cap plus cash less debt) is $46, making my E2E Ratio, 0.63.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 25%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is 4.

Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $60. My worksheet target prices are derivatives of my fair value estimate.

Bristol Meyers Squibb Company, Inc. (NYSE: BMY) – FYE 12/2019 – FAIRLY VALUED – The stock is currently trading at levels above my most recent $36 initiate target, but below my most recent $76 reduce target. Please See Linked PDF Worksheet

There you are, short and, hopefully, to the point.

Wax
Revised on 05/03/2020