If you had moved all of your equity capital into stocks in the healthcare sector on January 1, you would have been fully invested in the best-performing sector of the year to date. You’d also be down more than 25%, on average.
Some Stocks Unfairly Thrown Out With The Market
There just hasn’t been any escaping the financial storm of the past year, but when we look back two or three years from now, we will find stocks that were unfairly "thrown out with the bathwater" back in 2008. Many of them will be in the healthcare sector, a group that has been a traditionally defensive investment during recessionary times. (For more, see Recession-Proof Your Portfolio.)
How will we tell which stocks were unfairly punished? They'll be the ones that make it back to their highs of 2007 or early 2008. Given the severity of losses we're seeing this year, don't count on the bulk of the S&P 500 to make it back to their prior highs within three years. At current prices, many stocks would have to double, triple or much more.
Bristol-Myers Could Make The Climb
Bristol-Myers Squibb (NYSE: BMY) may be one of the few to make it back. Shares can currently be bought for just over $20 versus their near-term high of $30.66 in 2007. Bristol's third-quarter earnings showed revenue growth of 15%, and the company also booked a $2.1 billion gain by selling a business unit to private equity firms in August.
Sales of top revenue contributor Plavix (used to treat coronary disease) grew by 15%, while sales of Abilify (an anti-depressant) were up 34%. Bristol also grew its operating margin, net margin and return on equity in Q3. The company plans to divest a 10-20% interest in pediatric nutrition segment Mead Johnson via an IPO in mid-2009. The offering could net Bristol between $400 million and $700 million in cash and would value the remaining stake (to be held by the company) at $2 billion to $2.4 billion.
Shares currently trade for just 10 times forward-earnings estimates, and the PEG ratio of 1.06 is a full 30% below the industry average.
Thoughts On The ImClone Deal
I’m glad that Bristol was outbid by Eli Lilly (NYSE:LLY) for Erbitux maker ImClone Systems (Nasdaq: IMCL). There is simply too much value in this market to be paying up for growth. Eli Lilly doesn’t think that Imclone will add to net earnings until 2013, which is a long time to wait. A big reason was the premium for IMCL shares. It surely would have been lower - given the market collapse of the past two months - had Imclone not been fostering rumors of a "secret, higher bidder" (which turned out to be Lilly) while Bristol's bid was on the table.
Either way, I chalk it up as a serendipitous miss for Bristol-Myers and look for the company to be a selective buyer of companies with strong growth - and for much more attractive multiples. The side benefit of the whole affair is that Bristol made a tidy profit on the millions of IMCL shares (worth over $1 billion) it picked up during the initial courtship phase.
Proceeds from the IMCL shares will be added to the already massive $7.1 billion cash balance, to which the Mead Johnson IPO also will be added. All told, BMY could be sitting on nearly $10 billion in cash by the end of 2009. That’s a lot of powder in the keg for acquisitions, buybacks and supporting the 6.3% dividend yield.
Balance Sheet Strength
I simply can't emphasize enough the importance of demanding strong balance sheets in your equity holdings. It's an extra layer of insurance that is desperately welcome in these uncertain times. Bristol's balance sheet strength is typified by the cash levels, but the debt is also stellar. The nominal amount of $6.3 billion sounds high, but at an average maturity of 21 years, there's absolutely no short-term pressure coming from debt. (For more on this topic, see Debt Reckoning.)
Parting Thoughts
There has been some talk of Bristol itself being a potential acquisition candidate, but given the company's $40 billion market cap and the premium shareholders would require to get the deal done, I don't see it happening in this climate. Only someone like Pfizer (NYSE:PFE) could even attempt it.
I see Bristol-Myers making a good run at previous highs all on its own, and a big boost would be an immediately accretive acquisition of a mid-size biotech company with a strong late-stage pipeline.
Do you have a favorite pharmaceutical stock? Will the economy pick up in 2009, or are we destined for deep recession? Join me in the Investopedia Community (EpiphanyOne) to discuss your views and make your stock picks for all to see.
