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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Bristol-Myers Squibb

August 11th 2012 Bristol-Myers Squibb
NYSE Symbol: BMY
Industry: Drug Sector
Price as of 8/10/12: $31.73

The major averages have become very resilient this summer creeping back toward the highs of the year even as the global economies continue to slow. Any recent weakness in the major averages has been short lived as buyers stand ready to step in on any dips. The beaten up energy, materials, and industrial sectors are showing some life once again which is another positive for the broader markets. Having said that, many investors remain cautious ahead of the seasonal weak fall season as indicated by the news 52 week highs in the defensive telecom and consumer staple space. The healthcare space has also been a great place to hide as Merck, Abbots Labs, Gilead Sciences, Eli Lilly, Pfizer, and Amgen have all made new recent 52 week highs. The one notable blue chip drug stock absent from this list is also our featured stock of the week, Bristol Myers. Bristol was having a great year up until the end of July when the company voluntarily suspended their promising hepatitis C drug on safety concerns. The stock dropped over 10% following those results and hasn't recovered since. Longer term, the recent weakness has provided a buying opportunity for investors looking for a blue chip defensive stock with not only great fundamentals, but also a dividend yield over 4% far exceeding most rivals. The way investors have been gobbling up dividend stocks, it may not be long before Bristol regains its' upward momentum.

First the bad news. Back on July 25th, Bristol-Myers Squibb posted second quarter net sales of $4.4 billion, a decrease of 18% compared to the same period a year ago, following the U.S. patent expiration of Avapro/Avalide in March 2012 and Plavix May 2012. Excluding Plavix and Avapro/Avalide, net sales grew by 8% compared to the second quarter of 2011. U.S. net sales decreased 27% to $2.6 billion in the quarter compared to the same period a year ago following the U.S. patent expiration of Avapro/Avalide and Plavix. International net sales decreased 1% to $1.9 billion. Management at Bristol have been preparing for the expected patent expiration of Plavix and Avapro/Avalide for a number of years by looking to grow new key products and drugs along with the acquisition of Amylin. Investors gave the stock and management the benefit of doubt.

Then, a few days following the earnings report, Bristol voluntarily decided to stop a Phase II study of its hepatitis C treatment BMS-986094 (formerly known as INX-189) due to a safety related issues. It is not yet known whether Bristol-Myer Squibb's treatment was responsible for the safety issue. Bristol acquired this drug from Inhibitex earlier this year. There is hope upon further investigation the drug will still be viable, but even if it isn't, Bristol has a new group of promising hepatitis C medicines, called nucleotide polymerase inhibitors, target polymerase, an enzyme essential for the hepatitis C virus to replicate.

Add in a recent insider trading scandal and Bristol really isn't having the summer they expected, however longer term the company has a well-diversified portfolio of drugs, plenty of cash flow, and a hefty dividend to reward shareholders. Compared to other companies in the pharmaceuticals industry and the overall market, Bristol-Myers' return on equity exceeds that of both the industry average and the S&P 500. The company has reported ROE of 30.52%, compare that to Johnson & Johnson whose ROE is half that at 14.26%. Furthermore, Bristol-Myers valuations are reasonable; the company currently trades at 15 times earnings, 2.6 times sales, and 3.3 times book value. Another aforementioned positive is the company's cash flow. Bristol-Myers operating cash flow is 4.79 billion, over a billion more than rival Gilead Sciences which announced an operating cash flow of 3.62 billion.

Bristol-Myer's stock may continue to lag the broader market in the short term, but longer term, strong fundamentals and a great dividend should reward shareholders once again.