SIVY ON STOCKS from money.com
June 1, 2001

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In need of a new image

Bristol-Myers is evolving from a consumer-products company to a drug giant.
But investors still haven't caught on.

By Michael Sivy

When you've been plodding along your whole life, it's hard to change your
image -- that's the challenge Bristol-Myers Squibb [BMY] now faces. Most
investors still regard the company as a slow-growth consumer-products
business defined by brand names such as Clairol and Excedrin. But they're
missing something important. Over the past few years, Bristol-Myers has
been repositioning itself as one of the nation's largest pharmaceutical
firms. And when investors catch on, the stock could receive a valuation at
least 30 percent above current levels.

I last recommended Bristol-Myers in September at $53.50 a share. The stock
has always received lower valuations than Pfizer and Merck because it gets
less than three-quarters of its sales from pharmaceuticals. But
Bristol-Myers had been transforming itself, and for a while, it looked as
if it was getting more respect. By January, the share price had risen
nearly 40 percent to top $74. But since then, the shares have given back
almost all their gains. One reason is that the company is posting flat
earnings growth this year. Moreover, several of the company's top-selling
drugs, such as Glucophage for diabetes, are facing competition from
generics, which will force lower prices and eat into market share. Even so,
the long-term outlook for the stock has actually improved.

On May 21, the company announced that it would sell Clairol to Procter &
Gamble for $4.95 billion. That sale will reduce the percentage of
Bristol-Myers' business that comes from consumer products. Even more
important, when the deal closes, Bristol-Myers will have $6 billion in cash
-- four times its total debt outstanding. That cash hoard can be used to
make acquisitions. Pharmaceutical giants are like movie studios -- they're
basically immense distribution systems looking for product. All
Bristol-Myers has to do is revamp its product pipeline with the acquisition
of boutique drug companies or biotech firms, and the stock will suddenly
look a whole lot flashier.

Since it won't be hard for Bristol-Myers to complete its transformation
into a drug powerhouse, without even hurting its balance sheet, you'd think
that investors would be giving the stock more of a premium. At $56.25,
Bristol-Myers trades at 24 times this year's estimated earnings. That's
certainly a fair valuation for a stock with a 12 percent core growth rate
and a 2 percent dividend yield. But if you look not at what Bristol-Myers
has been, but what it so easily could become, you'd think a substantially
higher P/E should be in order.

###

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