Monday Winners: Bristol-Myers, MedcoHealth and Goodrich Petroleum

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Among the biggest winners in Monday's early trading are Bristol-Myers Squibb ( BMY ) , MedcoHealth ( MHS ) and Goodrich Petroleum ( GDP ) .

Annual Biotech Confab yields Slew of New Winners

Biotech investors circle their calendars every spring for the annual meeting of the American Society of Clinical Oncology ( ASCO ). Many biotech firms use the event to provide updates on clinical trials of their cancer-focused drugs.

The biggest name at the confab is getting the most attention. Bristol-Myers Squibb (Nasdaq: BMY) is up more than +7% after announcing that its melanoma drug, ipilimumab, continues to show efficacy. In the past, many melanoma drugs have failed to deliver on their promise by the time clinical trials were completed. Yet ipilimumab, which works by triggering a patient's immune system to fight the cancer, made it all the way through the clinical testing with strong data.

Bristol-Myers Squibb is expected to seek Food and Drug Administration ( FDA ) approval later this year, and the drug could generate $500 million to $1 billion in annual sales if approved. The company had $19 billion in revenues in 2009, so the drug will not have a huge impact on sales, but likely would come with robust margins, and could boost earnings per share by +10% or more.

Shares are partially trading up on relief that good news has finally hit the tape for BMY. Shares had fallen steadily in the last two months, with valuations falling to around 10 times projected profits and the dividend yield had risen close to 6%. The other catalyst for shares is the possibility that BMY's efforts to focus on utilizing a patient's own immune-system could yield other promising drugs.

Action to Take --> As is the case with all major drug stocks, you should expect only modest share price gains compared to smaller biotechs. BMY's solid balance sheet can support a higher dividend. The company's annual dividend had been frozen at $1.12 per share from 2002 to 2006, and has still only risen to $1.25 since then. Yet the company's cash balance has risen from $2.2 billion to $8.5 billion during the past two years. As management grows increasingly confident that its drug pipeline will keep sales and profits from falling, then it could easily support an annual dividend closer to $1.50 or even $1.75 a share. The higher figure works out to a 7% dividend yield (even after accounting for Monday's gain), which may be the major appeal for shares in the quarters ahead.


Onshore Drillers in Focus

In light of the uncertainty surrounding the offshore oil drilling moratorium in the Gulf Coast, investors are starting to take a closer look at firms involved in land-based exploration. If output in the Gulf drops, that could lead to higher natural gas prices - a real boon for the land-based group that has been dealing with low prices for nearly two years.

Goodrich Petroleum ( GDP ) would be a typical beneficiary of any upward move in natural gas prices. After hitting a 52-week low around two weeks ago, shares have been steadily rebounding, and are up another +5% in Monday trading. If natural gas prices fail to rise, Goodrich still looks cheap, as the value of its oil and gas fields is roughly $16.50 a share, according to analysts at C.K. Cooper. That's roughly 15% above the current price. If and when natural gas prices rise, the asset values should rise commensurately.

Action to Take --> This looks to be a low-risk, high-reward play, and it's not too late to jump in despite the recent move. If natural gas prices start to rise (as they often do when we enter the peak summer season as air conditioners trigger increased electricity demand), shares could approach $20 or even $25. But if they rise very quickly, be prepared to book fast profits, as the long-term fundamentals for natural gas imply that we are unlikely to see the high prices that were posted a few years ago.


MedcoHealth is a Cheap PBM

As we noted in this morning's losers, MedcoHealth Soultions ( MHS ) may be in line to grab Walgreen's ( WAG ) Pharmacy Benefit Manager ( PBM ) business away from CVS Caremark ( CVS ) . That speculation is fueling a nearly +5% rise in shares of MedcoHealth. Shares of Medco had been steadily falling after the company reported in-line quarterly results in late April, down to levels that made it the most inexpensive PBM among its publicly traded peers. The downward move led management to announce a $3 billion share buyback in mid-May. That's "billion" with a "B."

Medco has already bought back so many shares that the share count has fallen by about -20% since 2006 to around 480 million. If the current buy back is completed at current prices, the share count would fall another -12% to -13% to around 420 million. That's one way to boost earnings per share ( EPS ) . As it stands, Medco appears to have ample growth opportunities, as companies continue to outsource their employee drug plans to PBMs. Sales are expected to grow close to +10% this year.

Action to Take --> Analysts have failed to raise their EPS forecasts to reflect the share buyback plans, so look for upward EPS revisions when the company reports quarterly results in late July. Today's gain looks to continue, and shares could approach $75 were they to be valued in line with the peer group (accounting for the reduced share count). That's a +25% gain from current levels.

-- David Sterman

Staff Writer


Disclosure: David Sterman does not own shares of any security mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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