Intro
Today we’ll look at two companies at the same time. Why two you might ask? Because they have very similar characteristics in many ways. Both companies have been spun off recently by a large pharmaceutical company – Viatris from Pfizer and Organon from Merck. Furthermore, they show the following similarities:
-High debt load due to one-time payment to parent company
-Stagnating revenues and hence a lack of growth
-Significant cash flow generation from existing products
-Small market capitalisation compared to the parent company
-Tiny or no dividend pay-out yet in order to reduce debt burden
-Limited analyst coverage
The above points might have led investors – that got the shares from the parent company – to sell them in the open market. As can be seen below, the valuation looks rather undemanding and might show good upside potential in the next two to five years.
Valuation
The two firms show a very undemanding valuation based on historical and short-term future numbers:
Viatris guides for an EBITDA of at least $6bn and free cash flow of $2bn in 2021. This translates into a free cash flow yield of approx. 12% and EV/EBITDA of less than 7x. As debt levels will decrease and costs will come down, these metrics will look even better.
In its prospectus dated February 13th, 2020, Viatris is forecasting unlevered free cash flows of $5bn to $6bn per year until 2024.
Organon guides for an EBITDA of at least $2.2bn and free cash flow of $1.3bn in 2021. This translates into a free cash flow yield of approx. 17% and EV/EBITDA of around 7.5x. Both rather compelling numbers.
What’s next?
Looking forward two to five years, it can be assumed that a big portion of the debt will have been repaid from the high internally generated cash flows and more analysts will follow the companies in more detail. Additionally, since the management is now solely focused on the spun off companies, there should be a much better focus – also on growth initiatives either internally of through acquisitions. If management is able to show positive growth numbers in the coming years, the market may reassess the companies and a double from the current depressed levels seems reasonable. Disclaimer: as with most stocks written on here, the author is long.
Current Prices
$14.07 per Viatris share
$29.01 per Organon share
