Description

Bayer is a well-known German company that has been around for over 100 years. Its ADR's trade here under the BAYRY symbol. In Germany its shares are listed under the BAYN GR symbol. There are 982 million BAYN GR shares outstanding. Each ADR is equivalent to 1/4 of a BAYN GR share.

In June 2018, Bayer acquired Monsanto for $57 billion of cash and the assumption of $9 billion of debt. At the time of the acquisition, Bayer's ADR was trading at $30 a share. The company financed the acquisition with shares and debt. Debt increased from $15 billion at year-end 2017 to $40 billion at year-end 2020. Shares outstanding increased from 840 million to 982 million. The acquisition became more expensive when lawsuits were filed contending that Monsanto's weedkiller, Roundup (glyphosate), caused cancer. The suits were successful. Bayer is in the final stages of paying the plaintiffs a settlement of about $13 billion. The result of this acquisition is a Bayer stock which seems to be inexpensive.

Bayer operates in three segments - Consumer Health Care (12%), Pharmaceuticals (41%) and Crop Science (47%)

Consumer Health Care offers well-know OTC products such as Bayer Aspirin, Claritin, Alka-Seltzer, Midol Aleve, Tinactin and others well known brands. In 2020 the division did $5.8 billion of sales and had EBITDA of $1.3 billion. Sales grow at 2% to 3% a year. It is a nice business.

Pharmaceuticals did $19.7 billion of sales in 2020 with $6.9 billion of EBITDA. 27%+ of sales were due to Xarelto which comes off patent in 2024. Eylea accounted for 14%+ of sales. It loses patent protection in 2025. While there are products in the development pipeline, none appear to be able to overcome the loss of protection for Xarelto and Eylea. As a consequence, EBITDA is expected to increase over the next several years before starting to slowly decline beginning in   2024. All-in-all, Bayer's pharmaceutical business appears to be on the same treadmill as the rest of the industry.

Crop Science consists of the Monsanto business and ag products that Bayer had owned before the acquisition. It is a peculiar business. It does not show fantastic growth, but it is highly valued. I agree with the science that says that the world is experiencing "global warming". As a consequence, plant life has to evolve to new conditions. Without science, evolution is slow. With science, we can attempt to modify the genetic makeup of seeds so that plants can tolerate and thrive under changed conditions - that is the value of Crop Science - the ability of the human race to feed itself.

Crop Science did $21.5 billion of revenue in 2020 with EBITDA of $5.2 billion. Revenue and EBITDA are expected to increase to $23.9 billion and $6.2 billion in 2024. In 2018 China National Chemical Corp bought Syngenta. Syngenta, when combined with the ag business already within CNCC, is the second largest company involved in crop science behind Bayer. CNCC paid $45 billion for the business which equated to 3.4 times revenue, 24.7 times EBIT and 19 times EBITDA. They overpaid, but China has a lot of people feed. Corteva (CTVA) is the third largest competitor in the business. The company was formed by the combination of the ag businesses of Dow and DuPont and the purchase of product lines that Bayer was forced to shed in order to buy Monsanto.

Corteva has a market cap of $34 billion. In 2020 it had sales of $14.2 billion and EBITDA of $2.3 billion, so it trades at 2.4 times sales and 14.8 times EBITDA. The company has little debt, pays a dividend and has repurchased shares. It's a nice company that should do well. Bayer has a enterprise value of $100 billion. It is the leading crop science company. Applying Corteva's multiples of sales and EBITDA to Bayer's Crop Science division equates a value of $51 billion to $77 billion. If that is so, and it is a big if, the Consumer Health Care and Pharmaceutical businesses are valued at $49 billion to $23 billion. At the high end, you own the two for 6 times EBITDA. At the low end, you own them for 2.8 times EBITDA. Those are very attractive multiples for two nice businesses. Last, it has been a wretched couple of years for Bayer with the publicity surrounding the lawsuits. Sentiment will hopefully improve. In addition there is a modest 3% plus dividend.

I think that Bayer stock, now $17, can trade at better than $20 which, when combined with its dividend, is a 20%+ rate of return.

Catalyst

Improving sentiment.