German blue-chip Bayer AG (BAYRY, Financial) has really gotten beaten up with its multibillion-dollar litigation payouts of Roundup. The stock is at a multiyear low, but it looks like the litigation issues will come to and end. The company is incredibly profitable and has a great portfolio of pharmaceuticals and crop science products.
The stock is dirt cheap. It’s forward price-earnings ratio is 7.26. It’s dividend yield is 4.3%. It trades at almost one times sales. The stock is way off its 10-year high. In 2015, the American depositary receipts traded at $38.23. Remember, that’s before the Monsanto buyout.
Around 38% of sales come from North America, while 31% is from Europe, the Middle East and Africa, 19% from Asia and 10% from Latin America. About 50% of sales comes from crop sciences, 38% from pharmaceuticals and 12% from consumer products.
The balance sheet is pretty strong. It shows 3.4 billion euros ($3.9 billion) in cash and 13 billion euros in receivables. The liability side shows 5.2 billion euros in payables and 38 billion euros in debt. The rating agencies have rated Bayer’s debt at BBB. I’d agree with that rating.
Litigation
Of course, the cloud hanging over Bayer’s head is litigation involving Roundup. The problem stems with claims that glyphosate-based products can lead to non-Hodgkin lymphoma (NHL) and multiple myeloma.
In 2020, Bayer agreed to settle with 100,000 claimants for $10.9 billion. The company failed to reach an agreement for a second round of claimants. Bayer set aside another $4.5 billion in litigation costs. The company has agreed to discontinue the use of glyphosate.
Morgan Stanly is bullish on Bayer. The investment bank has a target price of 70 euros when the stock was recently trading at 46.51 euros.
What got me on the Bayer bandwagon is an email from Mauldin Economics. The author, Thomas Clark, likened the situation to Chipotle (CMG, Financial), W.R. Grace (GRA, Financial) and Philip Morris International (PM, Financial). Each company had a temporary event, allowing investors to buy in at cheap prices for great companies. If you were lucky enough to get in close to the bottom of any of these three, you would have done phenomenally.
Clark also pointed out that Roundup accounts for about 1% of Bayer’s sales. Some of its pharmaceuticals include Aspirin, Alka Seltzer and Claritin. The stock is back to where it was in 2008 and the company has been around for 150 years.
I was looking at some of the Gurus who own the stock. Oakmark started buying in early 2018. They liked the addition of Monsanto and thought there would be synergies between the two companies and agriculture will keep growing. They weren’t wrong, just too early!
I’m a buyer on Bayer and I think you should be too. This is a true value situation, assuming the lawsuits don’t continue. Then it would be a value trap! I think we’re getting near the end of the litigation issues, Bayer will get through this, return to profitability and the stock will boom.
