Up 80%, It's Time to Sell

Who's the sucker that Bristol-Myers is trying to pawn the inflated shares onto? Its own shareholders.

Investors will have an option of exchanging some or all of their
Bristol-Myers shares for shares in Mead Johnson for a slight discount
-- $1.00 worth of Bristol-Myers will get you $1.11 worth of Mead
Johnson. The exact exchange rate will be determined by the price of the
companies over three trading days next month, but so far the exchange
is looking like a slightly better deal, with Bristol-Myers trading up
and Mead Johnson going down since the announcement.

With Mead Johnson sporting a much higher P/E than Bristol-Myers, the
exchange will benefit Bristol-Myers' earnings per share next year.
Plus, the resulting lower Bristol-Myers share count will decrease the
total cash Bristol-Myers currently pays out as dividends, which should
make that massive 5.1% yield feel a little safer; free cash flow hasn't quite covered the dividend over the past 12 months.

A private equity firm might have been willing to buy Mead Johnson
from Bristol-Myers for a premium, but that would have resulted in a
capital gains tax, which would only make Uncle Sam happy. And besides,
the company has a pretty decent war chest. After Mead Johnson recently
paid back a $1.75 billion loan by refinancing it, Bristol-Myers expects
to end the year with more than $10 billion.

It's interesting that while other drugmakers are diversifying away from being strictly drug companies -- Merck (NYSE: MRK) and Pfizer (NYSE: PFE) gained consumer health-care divisions with their recent acquisitions -- Bristol-Myers has divested its non-drug holdings, including Zimmer (NYSE: ZMH) and its medical-imaging and wound-healing businesses.

Bristol-Myers is making an all-in bet on drugs. If it can string
together a few blockbusters, perhaps we'll see Bristol-Myers' stock
rise 80%. Eventually.

 © 2009 UCLICK, L.L.C.