(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Bristol-Myers Squibb Co.'s (BMY) stock is down over 20% from its highs in 2018, but the stock is poised to recoup some of those losses, based on technical analysis, by about 9%. The stock is trailing the S&P 500 by nearly 12 percentage points, with the shares down almost 10% on the year versus the S&P 500’s rise of about 2%.
Bristol dropped in mid-April after reporting positive data from a phase 3 trial of its cancer drug Optivo. But those positive results were outdone when a competing drug from Merck appeared to be superior, sending Bristol shares tumbling.
The stock appears to have put in a solid technical bottom around $50.50 and have been trending higher along a new technical uptrend. Shares received an added boost when the price rose above a technical resistance level at $53. The chart does not present another level of technical resistance until $60.
The relative strength index (RSI) is also trending higher and appears to have bottomed as well. The RSI hit 17, indicating shares were oversold, at the end of April and had been trending higher since. Additionally, the RSI continued to trend higher, even when the stock was making new lows at the start of May, a bullish divergence.
Options traders appear to support the bullish outlook of the technical chart and are betting shares rise by about 6.5% by options expiration on Aug. 17. The $57.5 strike price calls have an open interest of about 9,000 open contracts and trade at roughly $1 per contract, suggesting a breakeven price in the options of $58.5 if held to expiration.
BMY PE Ratio (Forward 1y) data by YCharts
Any rise in the stock may only prove to be short-term, because the fundamental outlook for the business looks weak, while shares also trade at a premium to some of its peers. Analysts see earnings climbing by over 13% in 2018 on revenue growth of over 4%. But earnings growth is forecast to slow in 2019 to just 9% while revenue is expected to rise by about 5.5%.
The stock currently trades at roughly 15 times 2019 earnings estimates of $3.72 per share, which is well above Merck's earnings multiple of 13.4, and Pfizer's 11.9. Even when adjusting Bristol's earnings multiple for growth, the 2019 PEG ratio is about 1.65, well over fair value of 1.
Bristol will need to report not only better-than-expected results at the end of July, but it will also need to provide substantial guidance to turn any short-term rebound in the stock into a longer-term trend.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.