Bayer AG: Can it double in 5 years?

I do not doubt that behind the current legal issues, there is a rock-solid business. Bayer is the world leader in crop sciences. The growing population and limited resources will keep it relevant for the coming years. Pharma division has a couple of blockbuster drugs and an assuring pipeline for the future.

Not many companies operate in two different industries, so I will compare the business with pharma & crop sciences companies and comprehend their valuations. Also, Instead of looking for last year’s numbers, I will look for the next twelve months. It is because of the significant legal payout the previous year & partly because the business is predictable.

Business Comparison

Bayer is trading seven times the 2022 earnings, and the average mean is ~12X. It’s evident Bayer is cheaper when staring at earning multiples. But what can I expect in the long term? I will use Sven’s (my goto teacher) intrinsic discounted cashflow calculator and use the following criteria – PE of 12 (avg of companies), Growth at 3% & discount 15% for the standard case, which will have 60% probability. The worst-case scenario includes negative 2 % growth for coming years because of litigation and PE of 7, which will have a 30% probability. However, these estimates depend on core earnings (special category used by Bayer). I am comfortable with core earnings because it makes the comparison of performance over time relatively easier.

Intrinsic Calculation

The intrinsic valuation implies that I can expect a 15% return over the next couple of years when the business is bought at €56 or less. Given current price is ~€48, we can buy with an 8% margin of safety. So the answer is Yes, It can double in the next 5 years. The worst-case scenario being €40, a 17% downside. When evaluating downside with upside, I believe this is an excellent time to start a position.

When comparing Bayer with its past self, I again got a price of around €88 when revenue was €36 billion & net income was €4.5 billion. Assuming legal issues are primarily over & Bayer has kept aside sufficient funds for future settlements, We can expect revenue to be more than €36 billion, and net income may also rise to match its past glory. The stock price should also follow the lead. It implies ~100% upside in the relatively near future.

The current 4.2% dividend yield is just a cherry on top. I can enjoy a good dividend while waiting for nature to take its course and prices to revert to the mean. I am also optimistic about the consumer health business. Recently GSK(GlaxoSmithKline) vowed to split its consumer health division (Source & Current Status). Bayer already sold its Animal health division and might consider selling the consumer health division as well in case legal settlement goes beyond expected. It could fetch up to 15times EBITDA. They can use this windfall for reducing debts or paying one-time special dividends.

My story is simple, Pharma & Crop science divisions will grow at 3-5% every year. Today, the stock price reflects the actual state of affairs related to legal issues, but this too shall pass sooner or later. The market is pricing business as if there is no end to a legal battle, and the company will keep shelling billions after billion for coming years. No one can be sure of more legal actions or settlements, but a consumer health division can provide a hedge against all odds. I believe the company will come out in front once the legal battle is over. Until then, I can enjoy my dividend.

I am willing to walk my talk and have my skin in the game. I started my initial position, and I will increase it as and when I have liquidity.