As the coronavirus continues to spread in China, we’ve witnessed healthcare names, as well as travel, retail and other names with China exposure, experience plenty of volatility. Yet I think it’s fair to say that at this point in time, no one knows what sort of impact the virus will fully have on trade, global economies, global markets or individual stocks.
In other words, many investors are speculating right now. History shows that rampant speculation is a dangerous practice with regard to generating market returns. Instead, I think investors should continue to pay close attention to the underlying fundamentals of the companies that they own, or are thinking about owning.
It’s true that news about a potential pandemic is scary. I don’t blame anyone for feeling uneasy about the threat of this disease. But this unease is likely best pushed aside when making portfolio management decisions because fear is not an investment strategy.
For instance, shares of Bristol-Myers Squibb (BMY) - Get Report were down more than 4% on Friday, on no relevant, ticker-specific news. The healthcare space as a whole got crushed and BMY shares traded down alongside their peers. They were down another 0.7% on Monday as fears about the virus affected the entire market.
Bristol-Myers has been on an amazing run over the last six months or so. Shares were trading for $45 back in late July and, even after the sell-off, they’re hovering in the $64 area. I’m not surprised to see some profit taking after this massive, 40%+ run-up. However, it’s worth noting that the fundamental strength, related to the Celgene merger which closed in late 2019, remains in place and 40%+ run-up or not, Bristol-Myers shares still appear to be cheap.
During Bristol-Myers’ most recent quarter, the company beat Wall Street estimates on both the top and bottom lines, posting 6% revenue growth and 7% earnings-per-share growth. Management raised full-year 2019 adjusted earnings guidance as well (from the $4.20-$4.30 range to $4.25-$4.35), causing the stock to pop.
During the trailing twelve months, Bristol-Myers’ sales are up 7.1%. The company has generated $4.39 in adjusted earnings per share and nearly $7.6 billion in free cash flows during this period of time as well. The company’s operating income and operational cash flows are showing strong upward trajectories. And, most notably, analysts expect to see strong double digit bottom-line growth in 2020 once the benefits from the Celgene acquisition begin to show up in the comparable results.
Right now, Bristol-Myers is trading with a trailing twelve-month price-to-earnings ratio of 14.6. However, using the current analyst consensus estimate for 2020 earnings per share of $6.17/share, we arrive at a forward price-to-earnings ratio of just 10.4.
During the depths of Bristol-Myers’ sell-off in the summer of 2019 when shares fell to multi-year lows in the mid-$40’s, they traded with trailing twelve month P/E ratios of roughly 10.5.
If analysts are even close to being right about Bristol-Myers’ 2020 year-end bottom-line figures, then the stock still has significant room for growth to the upside even without multiple expansion in play. Furthermore, the stock pays a reliable 2.8% dividend yield, which may help provide a bit of peace of mind to investors as they wait for the pro-forma results to begin to roll in.
Investors won’t have to wait long for Bristol-Myers’ next quarterly report. Management is expected to provide fourth quarter and full-year data on Feb. 6. The whisper number pertaining to the bottom-line currently sits at $0.88/share, which would present negative 6.3% growth year-over-year. However, in Q1FY2020, analysts are expecting to see earnings of $1.50, which would represent 37% year-over-year growth, so it’s likely that the 2020 guidance provided during the upcoming report will dominate the rest of the numbers.
In the meantime, could the sell-off in Bristol-Myers, or the broader markets at large, continue? Sure they could. If a fraction of the paranoia that can be seen on social media spreads into the minds of traders, then it’s fairly likely that we will. Valuations have been frothy for awhile now and stock prices don’t just go up in a straight line; sell-offs are bound to occur. But, at the end of the day, I think it’s important to remember that we’ve seen pandemic scares before (SARS, MERS, Ebola, etc) and the stock market has quickly bounced back in each case.
Without the benefit of foresight, it’s impossible to say with certainty that this time will be more of the same. But, as a long-term investor, I've learned that doing nothing is oftentimes much better than panicking and allowing fear to dictate my decision making. I don’t have any immediate plans to significantly reduce my equity positions and if high quality names like Bristol-Myers sell off in the coming days or weeks, I'll likely be a buyer of the dip.