Returns as of 11/25/2021
Returns as of 11/25/2021
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Are stocks expensive? Many of them are. Valuations are sky-high after the massive gains generated over the last decade. However, not all stocks trade at nosebleed levels.
We asked three Motley Fool contributors to pick pharma stocks that remain attractively valued. Here’s why they think Bristol Myers Squibb (NYSE:BMY), Novartis (NYSE:NVS), and Viatris (NASDAQ:VTRS) are too cheap to ignore.
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Prosper Junior Bakiny (Bristol Myers Squibb): Investors are sometimes wary of undervalued companies. A cheap stock could be a sign of an unhealthy business the market has been rightly punishing, or so the argument goes. But when it comes to Bristol Myers Squibb, the exact opposite happens to be true.
Yes, this drugmaker is dirt cheap. It currently trades at only 7.6 times forward earnings, and its price to free cash flow (FCF) is just 8.8. For reference, the pharma industry’s average forward price-to-earnings ratio was 13.9 as of Nov. 17, while a price to FCF of less than 20 is widely considered to be good.
But Bristol Myers’ business is just fine. The company boasts no less than eight drugs that generate at least $1 billion a year. In particular, Opdivo and Eliquis still have considerable room to grow. Both are projected to rank among the three top-selling drugs in the world by 2026, according to market researcher EvaluatePharma.
Additional winners could be on the way. Bristol Myers Squibb has more than 50 clinical compounds in its pipeline.
Thanks to its rich lineup of current products, Bristol Myers generates enough cash flow to maintain its healthy dividend. The company currently offers a yield of 3.44% — well above the S&P 500‘s yield of 1.29% — with a cash payout ratio of 29.6%. That makes Bristol Myers a strong option for dividend-seeking investors.
With attractive valuation metrics, a solid portfolio coupled with a deep pipeline, and a juicy dividend yield, Bristol Myers has a lot to offer to investors. It’s worth purchasing shares of this drugmaker before they soar.
David Jagielski (Novartis): Investing in stocks with solid fundamentals that are trading at low prices is one way you can set your portfolio up for some attractive long-term gains. Multinational pharmaceutical giant Novartis isn’t going to be a top meme stock that spontaneously jumps in price, but you can expect this to be an investment that steadily grows in value over time.
Year to date, its shares are down 13% while the S&P 500 has risen 25%. But there’s no glaring reason to be bearish on the stock as the company has been performing well. Over the first nine months of 2021, Novartis’ net sales of $38.4 billion are up 7% year over year. And its net income of $7.7 billion has grown by 29%. Free cash flow of $10.2 billion is also 23% higher than it was a year ago.
What’s also great about Novartis is how diverse its business is. Its top 20 innovative medicines have generated $24.4 billion in product sales so far this year — a little less than two-thirds of all revenue. And many of these products have been growing at rates of at least 20% year over year, with psoriatic drug Cosentyx leading the way at $3.5 billion in year-to-date revenue. Novartis’ management believes the drug could hit at least $7 billion in annual revenue at its peak.
Overall, the company looks to be in solid shape. The downturn in price this year is an opportunity for value-oriented investors to scoop up an excellent investment. Today, Novartis shares trade at a forward price-to-earnings multiple of just 13. Industry giant Johnson & Johnson, by comparison, is at a multiple of more than 16.
An additional motivator to buy Novaris right now is its dividend. With the decline in share price this year, the stock is now yielding 3.9% — more than double the S&P 500 average of 1.4%.
Novartis stock is near its 52-week low and can be an ideal buy-and-forget investment to add to your portfolio today.
Keith Speights (Viatris): I agree that Bristol Myers Squibb and Novartis have attractive valuations. If you’re looking for an absolute bargain, though, check out Viatris. Its shares trade at only 3.6 times expected earnings.
Normally, a stock that cheap would have some major gotchas. Not Viatris. It’s profitable. The company recently raised its full-year 2021 guidance. Probably the only real negative for Viatris is that it isn’t likely to generate sizzling growth anytime soon.
Those lower growth prospects are mainly due to the company’s focus on biosimilars and generic drugs. Just because revenue might not soar, though, doesn’t mean the stock won’t. Wall Street analysts have high expectations for Viatris. The consensus 12-month price target reflects a 54% premium to the current share price.
Over the longer term, Viatris should be able to provide stronger growth for investors. The company’s pipeline includes several biosimilars and complex drugs in development that could win regulatory approvals within the next few years.
In the meantime, Viatris rewards patient shareholders with an attractive dividend yield of nearly 3.4%. The company expects that it will increase the dividend payout in the future.
Viatris won’t be a top pick for growth-oriented investors. But for value and income investors, I think it’s one that should definitely be considered.
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Stock Advisor launched in February of 2002. Returns as of 11/25/2021.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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