Intro
When is enough enough? Since Bayer closed the acquisition of Monsanto in 2018, the company hasn’t been the same. Bayer incurred huge litigation costs associated with the takeover, a lot of trust and reputation has been lost and the share price fell from more than €100 per share to below €30 currently. A debacle.
Bayer generates around €50bn in revenues, of which 50% is from crop science, 38% from pharma and the remaining 12% from consumer health.
Valuation
The big elephant in the room are the litigation costs and hence free cash flow is impacted by litigation pay-outs and also one-time costs for transformation to reorganize the business.
Bayer currently trades below book value, showing a P/B of 0.85. Just recently, the company basically suspended its dividend (they still pay out a small minimum dividend which is marginal) for the next three years.
Adjusted for the litigation effect, Bayer is still expected to generate an EPS of around €5-6, which translates into an adjusted P/E of roughly 5x.
In sum, if the litigation effect is taken out, rather cheap valuation metrics.
What’s next?
Is now enough? Of course, this is impossible to answer. However, it seems like that everybody has left this ship who wants to be out: results have been bad, litigation takes longer than expected and the dividend has basically been suspended. After this last bad news, the stock has held steady might indicating that the worst for the stock is over.
Although it needs a lot of phantasy currently, if we fast forward 3-5 years, the company will presumably have reduced its debt load by approximately €4-6bn, hopefully solved the crop science issues and invested into its crop science as well as pharmaceutical pipeline. And then, we may see a resumption of the dividend payments once again. Time will tell.
Current Price
€28.82 per share
Disclosure
The author is currently not long Bayer; however, his close relatives have some exposure.
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