Shares of Bristol-Myers Squibb Company Underperform the Market.

Drug manufacturer Bristol-Myers Squibb Company slumped -6.2% to a price of $66.75 and is now 18.04% below its average analyst target price of $81.44. The average analyst rating for the stock is buy, so many investors will be considering to buy in at these discounted prices. Are they on the right track?

Bristol-Myers Squibb is categorized within the healthcare sector, which groups together with a wide range of pharmaceutical, medical equipment, biotechnology, and medical care facilities companies. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2022, the healthcare sector has an average P/E ratio of 15.91, and the average for the S&P 500 is 15.97.

Bristol-Myers Squibb company's trailing 12 month P/E ratio is 22.2, based on its trailing Eps of $3.01. The company has a forward P/E ratio of 8.3 according to its forward Eps of $8.02 -- which is an estimate of what its earnings will look like in the next quarter.

Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. Bristol-myers squibb company's year on year (YOY) quarterly earnings are growing at a rate of 40.4% and its YOY quarterly revenues are increasing at a rate of 1.6%. Since the earnings growth rate is higher than the revenue growth rate, we can deduce that the company's profit margins are widening. Companies can increase their earnings at a faster rate than their revenue by reducing their tax liability, raising prices, or cutting their overhead or the cost of goods sold.

Unlike earnings, gross profits are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack therefor. BMY has gross profit margins of 79.8%, which indicates that it potentially benefits from a sustained competitive advantage over its peers, allowing it to maintain highly profitable pricing structures.

Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in Bristol-Myers Squibb Company's levered free cash flow of $13,855,375,360.

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in BMY have received an annualized dividend yield of 3.0% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Bristol-Myers Squibb's P/B ratio is 4.4 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.12 as of the second quarter of 2022.

Since it has a very high P/E ratio, an inflated P/B ratio, excellent profit margins, an analyst consensus of some upside potential, and strong cash flows, Bristol-Myers Squibb is likely fairly valued at today's prices. We hope you enjoyed this overview of BMY's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.