Bristol-Myers Squibb recently reported fourth quarter earnings and exceeded forecast earnings per share
Shares have been volatile over the past 12 months
Wall Street's consensus outlook for the next 12 months is mixed
The market implied outlook (calculated using option prices) is slightly bullish through mid-2022, but slightly bearish for the full year
On Feb. 4, pharmaceutical giant Bristol-Myers Squibb (NYSE:) reported. While the New York City-based health company's results have been solid, with this quarter's gains driven by its immuno-oncology drug Eliquis, as well as increased use of its melanoma drug Opdivo, the outlook for longer-term growth is worrying.
The consensus for EPS growth over the next three to five years is 4.05% per annum. Potential growth is limited by the expected consequences of the expiry of patent protection on several high-earning drugs.
The large difference between the TTM P/E (20.8) and the estimated P/E based on earnings expectations (8.3) shows how sensitive the current valuation is to the earnings outlook.
BMY has been volatile over the past year, closing just above $69 twice in August and going as low as $53.60 in late November.
12 month BMY price history.
Source: Investing.com
BMY's recent share price appreciation, with a total return of 10.6% over the past three months, is remarkable, stock performance over the past 1, 3, 5 and 10 year periods has lagged to the sector averages.
BMY Trailing Returns vs. Drug manufacturers sector, stock index.
Source: Morningstar
BMY has delivered consistent earnings growth, exceeding analyst expectations in every quarter for the past four years, except the first quarter of 2021. The stability of earnings growth contrasts notably with substantial stock price swings, indicating that volatility is driven by instability in the long-term outlook.
Lagging and Estimated Future Quarterly EPS for BMY.
Green (red) values ??are the amount by which the EPS exceeded the expected value (missed). Source: e-commerce.
BMY has increased the dividend for 15 years in a row and the current payout ratio is a modest 26.8%. The lagging three- and five-year dividend growth rates are 7.7% and 5.6%, respectively. In addition to its current dividend yield of 3.47%, BMY is likely to get some attention from income investors. The Gordon growth model predicts total returns of 9%-11% based on current revenue and dividend growth, although the applicability of this model to a company with such potentially volatile earnings is debatable. However, expected returns in this range appear reasonable in light of past performance.
I last wrote about BMY on September 16, when I assigned a neutral/hold rating. In the (almost) five months since then, BMY has risen and delivered a total return of 11%, compared to 1.1% in the same period.
BMY's valuation looked decent in September and Wall Street's consensus assessment was bullish, with a 12-month price target roughly 24.5% above the stock price at the time. I maintained my neutral rating on BMY because the consensus outlook for the options market showed a less optimistic picture.
The price of an option on a stock reflects the market's consensus estimate of the probability that the stock price will rise above (call option) or below (put option) a certain level (the option's strike price) (the option's strike price) between now and when the option expires. By analyzing the prices of call and put options against a range of strike prices, all with the same expiration date, it is possible to calculate a probable price prediction that aligns option prices. This is called the market implied outlook and represents the consensus outlook among option buyers and sellers.
With nearly five months since my last post on BMY, along with recent strong earnings, I'm revising my analysis.
Wall Street Consensus Outlook for BMY
E-Trade Calculates the Wall Street consensus outlook for BMY by combining the opinions of eight ranked analysts who have published ratings and price targets in the past 90 days. While the consensus rating is bullish, the 12-month consensus price target is just 2.8% above the current share price.
BMY Wall Street Analyst Consensus Rating, 12 Month Price Target.
Source: E-commerce
Investing.com calculates the Wall Street consensus based on the views of 21 analysts. The consensus rating is bullish and the 12-month consensus price target is 9.2% above the current share price.
BMY Analyst Consensus Assessment and 12 Month Price Target.
Source: Investing.com
While the Wall Street consensus calculated by both E-Trade and Investing.com is bullish, the differences in the individual 12-month price targets and even between the two consensus calculations show that there is a fairly wide range of opinion among the individual analysts. The average of the two consensus price targets gives an expected 12-month price return of 6% and an expected total return of 9.5%, very close to the lagging 10-year total return for BMY. Market Implied Outlook For BMY
I calculated the market implied outlook for BMY through mid-2022 (using options expiring on June 17, 2022) and through early 2023 (using options that expire on January 20, 2023) . I chose these two options expiration dates because the options expiring in June and January are generally very liquid. The amount of interest outstanding for options on BMY is high for these two expiration dates.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
BMY market implied price return probabilities through June 17.
Source: Author's calculations using option quotes from E-Trade.
The market implied outlook for June 17, 2022 is generally symmetrical, with similar opportunities for positive and negative returns of equal magnitude. The distribution is centered near zero efficiency. The annualized volatility calculated from this breakdown is 23%, quite low for an individual stock.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution around the vertical axis (see chart below).
BMY market implied price return probabilities for a period of 4.3 months.
The negative return side of the distribution is rotated about the vertical axis. Source: Author's calculations using options quotes from E-Trade.
This view shows that the probabilities of positive and negative returns of the same magnitude are very similar (the solid blue line and the dotted red line are exactly on top of each other). The theory suggests that the market-implied outlook is expected to be negative, as investors are generally risk averse and tend to pay more than fair value for downside protection. As such, this market-implied outlook is interpreted as somewhat bullish.
The market-implied outlook for the next 11.4 months, from now until January 20, 2023, favors negative price returns. The chances of negative returns are consistently higher than for positive returns of the same magnitude (the red dotted line is consistently above the solid blue line). I interpret this outlook as somewhat bearish. The annualized volatility calculated from this outlook is 26%.
Market-implied price return opportunities for a period of 11.4 months.
The negative return side of the distribution is rotated about the vertical axis. Source: Author's calculations using options quotes from E-Trade.
BMY has positive momentum, bolstered by recent strong gains. The market implied outlook for June 17 is consistent with the continuation of the positive trend for now. However, the market-implied outlook for the full year is slightly bearish, reflecting longer-term concerns about earnings growth. The outlook for volatility is slightly higher for the full year than for the first half.
Summary
While BMY has risen in recent months, these gains mainly represent a recovery from the substantial decline at the end of 2021. Even with 10.6% gains in the past three months, BMY lags significantly behind the drug industry average of the year. last year.
Wall Street analysts' consensus rating is bullish, but there is a significant difference between individual analysts' forecasts and even between Wall Street consensus estimates. The average of E-Trade and Investing.com's 12-month consensus price targets implies a 12-month total return of 9.5%.
As a rule of thumb for a buy recommendation, I want to see a 12-month expected return that is at least half the expected (year-on-year) volatility. Taking advantage of the volatilities of the market-implied outlook, BMY falls short of this threshold. The market-implied outlook for mid-2022 is slightly bullish, but the full-year outlook is slightly bearish.
I maintain my overall neutral rating on BMY.
