SNY currently trades at $33-34
1- Business Performance Risk (-) and intrinsic returns (=)
|FCF / Sales||Last twelve months: 21%, in line with performance over the previous years, ranging between 18% and 24% with a few exceptions (4% in ’02!)|
|ROE||LTM: 12.5% higher than the average over the last 5 years of 9.2% and at the high end of the range over the last few years of 8%-12%|
|ROA||LTM: 7.4%, higher than the average over the last 5 years of 5.4%|
|Revenue Growth||Revenue growth over the last 4-5 years (post the Aventis acquisition) has been low, in the 3-4% with declines in 2007 – 2008|
|Cash distribution to shareholders|| Dividend yield: 3.3%|
The company has bought back 3% of its share over the last 5 years (cumulative)
Management “uses” cash to do acquisitions, spending $15Bn in 2004, 6Bn last year and now making a bid for Genzyme, for over $18Bn
SNY’s intrinsic returns could break down as follow (if it were not doing acquisitions every other year!):
- Dividend: 3.3% with a dividend payout ratio of 45%
- Organic growth: 2% (to be kind), financed using another 15% of earnings (on the basis of a “normal” ROE of 15%)
- Given the current earnings yield of 9.4% the remainder 40% of earnings could lead to buybacks worth ~4% of the company’s stock (not what management has done to date)
Total potential intrinsic returns: ~9%, not really great
2- Balance Sheet Risk (+)
|LT Debt / Equity||0.13x|
3- Valuation Risk (+)
|P/E||10.6x, well below the company’s 5-year average of 23x and below the current industry average of 12.4x|
I will not perform a company analysis of SNY as I have doubts about the business going forward with very little growth and a management that is focused on doing acquisition to keep growing vs. managing to get more cash back to shareholders.
While the valuation could leave some margin of safety I don’t think the will create enough returns organically to make me interested.
You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.
Have you looked at SNY recently? What was your takeway?
Many happy returns,