Research Firm: Market’s Risk Is Phenomenally High, 2nd Dive Likely
Lawrence Carrel, Contributor — May 27, 2020
Forbes interviewed Raymond Mullaney on May 27, 2020 and asked him to identify a very favorably-rated stock and a very poorly-rated stock using ERS’s technology. Below are quotes from that interview and a summary of the results.
Bristol Myers (BMY) “is a high-risk company [with] an FRI™ (Financial Risk) … of 95 and a PRI™ of 92”.
BorgWarner (BWA) is a “strong company with an extremely low risk profile… With an FRI™ of 22 and a PRI™ of 15.”
One year after the Forbes article was published, BorgWarner rose 58%, while Bristol-Myers only rose 9% and the S&P 500 was up 38%.
According to Equity Risk Sciences, Bristol-Myers Squibb BMY (BMY) is a high-risk company that has over borrowed, giving it a Financial Risk Indicator (FRI, an MRI for an individual company) of 95 and a Price Risk of 92. Over the 20-year period from 12/31/1999 to 12/31/2019, the drug company’s revenues grew an average of 1.7% per year, yet liabilities grew an average of 11.8% per year. At the beginning of the period liabilities were 46% of the drug company’s revenues and the share price was $61.12. By 2020, liabilities were 299% of its revenues and the share price had barely moved to $64.19. More dramatically, in the first quarter of 2019, total liabilities were $19.5 billion. Over the course of the year, they grew threefold to $79.3 billion. Mullaney said if revenues decline, the company would have trouble managing its debt.
Meanwhile, a fundamentally strong company with an extremely low risk profile is Borg Warner (BWA). For the 20 years from 1999 to 2019, BorgWarner BWA ’s revenues grew an average of 7.4% per year and liabilities at a rate of 4.8% per year. In 1999, liabilities were 77% of revenues and fell to 48% of its revenues by 2019. On 12/31/99, BorgWarner closed at $5.06 a share. Twenty years later it closed at $43.38.
In the first quarter of 2019, cash was $494 million and long-term debt was $1.9 billion. A year later cash nearly doubled to $901 million and long-term debt has fallen to $1.66 billion. With an FRI of 22 and a price risk of 15, Mullaney calls this, ”Very boring but solid and cheap. Unless we have a devastating blow to the economy, it’s very undervalued.”