Is Bristol-Myers Squibb Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Bristol-Myers Squibb fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Bristol's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Bristol's key statistics:


BMY Total Return Price Chart

BMY Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

(6.3%)

Fail

Improving profit margin

42.8%

Pass

Free cash flow growth > Net income growth

64.3% vs. (81.5%)

Pass

Improving EPS

(78.3%)

Fail

Stock growth (+ 15%) < EPS growth

83.7% vs. (78.3%)

Fail

Source: YCharts. * Period begins at end of Q4 2009.

BMY Return on Equity Chart

BMY Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(83.2%)

Fail

Declining debt to equity

26%

Fail

Dividend growth > 25%

9.4%

Fail

Free cash flow payout ratio < 50%

35.8% 

Pass

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we're going
A mere three out of nine passing grades isn't particularly compelling for a well-established pharmaceutical leader. What looms over the horizon for Bristol? Are there drugs in the pipeline ready to bridge the inevitable patent cliff, or will investors be taken over the edge by a company with some wildly divergent financial fundamentals?

My fellow Fool Sean Williams pointed out valid reasons for optimism earlier this year, despite the big drop in net income of late. Most notably, the approval of stroke-prevention drug Eliquis, which was developed in tandem with Pfizer , is big news. The current stroke-prevention treatments don't seem to hold a candle to Eliquis, which points to multibillion-dollar sales down the line. The oral SGLT-2 inhibitor drug Forxiga, developed with AstraZeneca , could also be a big step forward in diabetes treatments.

Bristol also appears to have a diverse enough pipeline to avoid a total patent cliff swan dive. Fool contributor Keith Speights notes that only Sanofi earns more of its revenue from its "other" drugs, the non-blockbusters that can still add up to big money over the course of a fiscal year. Until last year, Bristol actually initiated more clinical trials than Sanofi. It may need to pick up the pace in this regard, as it's already lost a big chunk of revenue from the Plavix patent expiration, and only Eli Lilly risks more aggregate revenue losses from expiring patents over the next two years. However, at the moment, Keith believes that Lilly has the better and more attractive dividend payout.

Bristol will need to avoid disasters like its 2012 Inhibitex purchase, which wound up as a near-total loss as that company's hepatitis treatment turned out to be a dud. It's yet to discover anything (Eliquis and Forxiga notwithstanding) that can replace the cash-spinning power of Plavix, but investors aren't deterred -- if you believe the share price gains of recent months, the best is still to come.

Putting the pieces together
Today, Bristol has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Is Eli Lilly a buy or sell?
With two of its top three drugs poised to lose patent protection this year, is Eli Lilly a dividend stock headed nowhere fast? In a new premium report, The Motley Fool's senior pharmaceuticals analyst breaks down all of Lilly's moving parts, including an in-depth analysis of the company's must-know opportunities and reasons to buy and sell today. To find out more click here to claim your copy today.

The article Is Bristol-Myers Squibb Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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