Bristol-Myers Squibb Company (NYSE:BMY) shares are up more than 6.13% this year and recently decreased -1.39% or -$0.86 to settle at $61.16. AbbVie Inc. (NYSE:ABBV), on the other hand, is up 52.36% year to date as of 12/05/2017. It currently trades at $93.90 and has returned -0.01% during the past week.
Bristol-Myers Squibb Company (NYSE:BMY) and AbbVie Inc. (NYSE:ABBV) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect BMY to grow earnings at a 10.86% annual rate over the next 5 years. Comparatively, ABBV is expected to grow at a 15.21% annual rate. All else equal, ABBV’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 40.46% for AbbVie Inc. (ABBV). BMY’s ROI is 19.80% while ABBV has a ROI of 18.00%. The interpretation is that BMY’s business generates a higher return on investment than ABBV’s.
The value of a stock is simply the present value of its future free cash flows. BMY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.49. Comparatively, ABBV’s free cash flow per share was +1.32. On a percent-of-sales basis, BMY’s free cash flow was 4.13% while ABBV converted 8.22% of its revenues into cash flow. This means that, for a given level of sales, ABBV is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. BMY has a current ratio of 1.60 compared to 1.50 for ABBV. This means that BMY can more easily cover its most immediate liabilities over the next twelve months. BMY’s debt-to-equity ratio is 0.57 versus a D/E of 5.65 for ABBV. ABBV is therefore the more solvent of the two companies, and has lower financial risk.
BMY trades at a forward P/E of 19.11, a P/B of 6.88, and a P/S of 4.94, compared to a forward P/E of 14.52, a P/B of 22.77, and a P/S of 5.59 for ABBV. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. BMY is currently priced at a -4.17% to its one-year price target of 63.82. Comparatively, ABBV is -5.96% relative to its price target of 99.85. This suggests that ABBV is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for BMY and 2.30 for ABBV, which implies that analysts are more bullish on the outlook for BMY.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. BMY has a beta of 1.17 and ABBV’s beta is 1.53. BMY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.BMY has a short ratio of 1.43 compared to a short interest of 2.21 for ABBV. This implies that the market is currently less bearish on the outlook for BMY.
AbbVie Inc. (NYSE:ABBV) beats Bristol-Myers Squibb Company (NYSE:BMY) on a total of 7 of the 14 factors compared between the two stocks. ABBV generates a higher return on investment, is more profitable, has higher cash flow per share and has a higher cash conversion rate. ABBV is more undervalued relative to its price target. Finally, DRRX has better sentiment signals based on short interest.