|Shares Out. (in M):||934||P/E||0||8.0|
|Market Cap (in $M):||58,104||P/FCF||0||0|
|Net Debt (in $M):||36,220||EBIT||0||0|
Bayer AG Common, BAYN GY Equity, €62.21
Two components + optionality to the thesis.
First component is tighter: Scared German investors have overreacted to the Monsanto Glyphosate litigation. The market is pricing in ~€32b in liability. Our view is that a poor outcome would be €10b in value destruction, and we think par is €3 – 4b. Bayer will be generating €6 – 8b of real FCF annually – any realistic liability will be easily funded. We think the company will recover this net €28b of lost value, which drives 55% upside at 12x 2020 EPS.
Second component is flabby but provides margin of safety: This is a cheap stock in a beaten-up German equity market. Setting aside the ongoing debate about what value investing is, this is an equity that meets all of the criterion for a statistical value investment. And unlike most other statistically cheap equities, Bayer generates a ton of cash, grows, and there aren’t any huge secular boogeymen. We don’t think it’s unreasonable for the stock to trade at 14x vs the 12x assumed in the first valuation above, which would drive an additional 25% upside.
Finally, there are articles suggesting that Elliott owns the stock. An activist with a breakup and/or cost cutting plan could drive a tremendous amount of upside.
Bayer is a German agricultural and pharmaceutical conglomerate. It’s a complex business, and each piece requires work to understand. The sellside understands this business well, and a quick way to ramp up on the business is to read Initiation of Coverage reports. This writeup will focus on thesis drivers.
In May 2016, Bayer announced that it was acquiring Monsanto for $63b in cash to create the #1 player in global Crop Science. After an arduous regulatory review process, the deal was approved and closed in June 2018. The consideration was funded with €36b of cash and debt, €12b of asset sales, and €6b from an equity rights offering.
2 months after closing on 8/10/18, a California jury delivered a surprising judgement of $289mm (incl $250mm punitive) to a California man who alleged that Roundup, Monsanto’s flagship herbicide made with glyphosate, caused his non-Hodgkin lymphoma following years of Roundup use. Bayer stock traded down >16% over the ensuing week – €14b of value destruction.
Since the initial case, BAYN has had 2 additional adverse developments. On 10/22/18 a California judge only reduced the first $289mm judgement to $79mm. Many had thought that this would get reduced even more significantly. Bayer has appealed again. Second, On 3/19/19 another jury in SF California awarded another man with non-Hodgkin lymphoma $80mm (incl $75mm punitive). The stock has now underperformed the DAX by 37% since the judgements came out.
2-year performance: SPX +27% (yellow), DAX +4% (orange), BAYN -35% (white)
Consensus blended 1-year forward P/E multiple: SPX 16.7x, DAX 12.8x, BAYN 8.5x