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Stock Screen: Value Line Financial Rank Changes - October 12, 2012
Value Line assigns Financial Strength ratings across a spectrum from A++ (Highest) to C (Lowest). Generally speaking, the largest companies with the strongest balance sheets get the highest scores. Factors considered in making a rating determination include balance sheet strength, earnings performance, market capitalization, stability of returns, and business outlook, among others.
The Financial Strength rating and a stock’s Price Stability rank are the two main components used to determine Value Line’s proprietary Safety Rank, which measures the total risk of a stock relative to the approximately 1,700 other stocks under Value Line review.
Although a company’s Financial Strength rating is just one factor among many that investors should consider, it is an important one. Moreover, shareholders should take particular note of changes in this rating—both up and down. Value Line subscribers have access to our complete list of Financial Strength upgrades and downgrades each week in the Selection & Opinion section of the Value Line Investment Survey. Noted here, however, are recent upgrades awarded to Bristol Myers Squibb (BMY) and Pfizer (PFE - Free Pfizer Stock Report)
Bristol-Myers Squibb manufactures proprietary medical products, ethical pharmaceuticals, diagnostics, infant formula, orthopedic implants, and health & beauty aids. Major brands include Plavix, Avapro, Pravachol, Coumadin, Reyataz, Sustiva, Braclude, Erbitux, Taxol, Sprycel, Ixempra, Abilify, Enfamil, and Enfagrow. Acquired Medarex in 2009. International operations account for 53% of sales.
The company is in the process of augmenting its diabetes offerings. In early July, the company signed an agreement to purchase Amylin Pharmaceuticals for cash of $31 a share (equivalent to approximately $5.3 billion), plus the assumption of debt. BMY will also pay Eli Lilly $1.7 billion to settle Amylin’s obligations following termination of the Lilly/Amylin partnership. Amylin has a new type of treatment for Type 2 diabetes, which is injected twice a day.
Bristol also has some potential winners in Phase III clinical trials, which should help counteract the revenue lost from patent expirations. Revenues are being constrained by last year’s patent expiration of Plavix, and sales should suffer when Avapro goes off patent later this year. However, there are new drugs in the pipeline that are set to fill part of the sales void, including Sprycel (leukemia), Abilify (schizophrenia), Orencia (rheumatoid arthritis), Reyataz (HIV 1), Eliquis (stroke), and Anti-PD-1 (cancer).
Britol-Myers stock is a solid choice for the conservative investor. It has a good dividend, which is well covered and should continue to climb at a mid-single-digit clip over the pull to 2015-2017. What’s more, strong cash flow from operations, coupled with a healthy balance sheet ought to enable the company to continue making complementary acquisitions in the years ahead. Given its stellar financial position, we now give the company an A++ Financial Strength rating.
Pfizer is a global pharmaceutical company engaging in the discovery, development, manufacture, and sale of medicines for people and animals. Top-selling products last year included Lipitor (cholesterol), Enbrel (rheumatoid arthritis), Lyrica (epilepsy), Prevnar (vaccine), Celebrex (arthritis pain and inflammation), Viagra (erectile dysfunction), Xalatan (glaucoma and ocular hypertension), Norvasc (hypertension), and Zyvox (bacterial infections). International business accounted for 60% of revenues in 2011.
Although profits are generally improving, the Lipitor expiration continues to loom large for Pfizer. Total revenue declined low double digits in the June quarter relative to the prior year, as Lipitor’s loss of exclusivity (which happened last November), hurt comparisons.
Emerging pipeline prospects should help to lesson the pressure down the road. The company maintains a healthy mix of medicines in various stages of testing across several therapeutic segments. In terms of late-stage pipeline, two potential blockbusters stand out in Eliquis, for stroke prevention and tofacitinib, for the treatment of rheumatoid arthritis. Despite both products experiencing delays in recent months, management continues to exhibit considerable enthusiasm over their long-term commercial-growth prospects.
Based on recent progress in the product pipeline, we are cautiously optimistic that the emergence of fresh offerings will be enough to mitigate the Lipitor impact, longer term. Effective cost discipline and increased contributions from emerging markets are also expected. Hence, we look for decent annual profit growth over the 3 to 5 years ahead.
What’s more, These shares are well suited for conservative investors. The stock carries our Highest (1) Safety rank and displays a dividend yield that is above the Value Line median. With that in mind, we have boosted the equity’s Financial Strength rating to A++.
At the time of this writing, the author did not have any positions in any of the companies mentioned.