Can Bristol-Myers Squibb Recover?

Bristol-Myers Squibb doesn't have a pill to make shareholders feel better for the 30%-plus hit their stock has taken since peaking at $32 last July -- or, for that matter, for the 71% plunge since early 2001.

If you need a little pick-me-up for your portfolio, though, consider buying Bristol shares today. The stock (symbol BMY) is washed-out, suggesting little downside risk from current levels and, if a few things go right, the shares could gain 25% over the coming year.

But first, why the big drop? Bristol-Myers is in good company, having slid along with most of the other drug makers that are collectively known as big pharma. The two big concerns: Many major patents are due to expire in coming years, and a tighter regulatory environment will create a "revolutionary change" in the industry, says Credit Suisse analyst Catherine Arnold.

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She says the Food and Drug Administration will ratchet up scrutiny in the coming months, and the election of a Democratic president would put pressure on drug prices. Plans of both Hillary Clinton and Barak Obama include allowing Medicare to negotiate drug prices, which would effectively regulate pill prices, and permitting drugs that carry lower price tags in foreign countries to be re-imported to the U.S.

But Bristol is really cheap, much cheaper than I think this high-quality, profitable company deserves to be. At its March 28 close of $21.48, the stock is near both a 52-week and a five-year low.

Another pillar that should prop up the stock is its lush yield. Based on the annual cash dividend of $1.24 per share, which I think is secure, the stock yields 5.8%.

As for profits, analysts expect Bristol to earn $1.69 a share in 2008. That's a 14% increase over last year's earnings and compares with a 10% average earnings increase for the drug industry sector. Earnings "growth at rates near the top of big-pharma and a very attractive valuation" -- 13 times estimated '08 profits -- recently prompted Zacks Equity Research to bump up its rating on Bristol from hold to buy.

Earnings growth a few years down the line is a little shaky, though. The Zacks analysts, Brian Marckx and Jason Napodao say current earnings are driven by the "mega-blockbuster" drug Plavix, which helps prevent heart attack and stroke. However, they point out, the Plavix patent expires in 2011. Unlike some other drug companies, though, Bristol's pipeline contains some promising new drugs, which could fill the gap once Plavix generics start flooding the market.

But there's a big kicker. Given Bristol's low price, the Zacks analysts think the company is an attractive takeover candidate for even bigger drug companies, such as Sanofi or Pfizer.

Maybe. But if that doesn't happen, you can comfort yourself by collecting those fat dividends and watching the stock rise when the market rebounds.