Doubtful About Sanofi-Aventis

| About: Sanofi (SNY)

Sanofi-Aventis (NYSE:SNY) is a “Large Pharma” company, with a focus on oncology, cardiovascular disease, central nervous system disorders, diabetes, and vaccines. The company made it to the idea pipeline as I reviewed the 5-star wide-moat rated company by Morningstar.

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!)


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%


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 free cash flow is strong, but its returns are low. These are, however, somewhat “artificially” low as SNY has been very acquisitive in the past and had to book a high level of intangibles on its Balance Sheet. However, the low returns would either be the sign of low returns or, (more likely) a sign of overpaid acquisitions over the years. In general, the management seems to be more concerned about growing through acquisitions that have created doubtful value vs. redistributing cash… a red flag for me.

SNY’s intrinsic returns could break down as follows (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


Current Ratio


No real balance sheet risk, until SNY loads up on debt to continue its acquisition binge.

3- Valuation Risk (+)



Cash Return



10.6x, well below the company’s 5-year average of 23x and below the current industry average of 12.4x

SNY’s valuation seems fairly attractive with a P/E of 10.6x.


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 acquisitions 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 it will create enough returns organically to make me interested.

Have you looked at SNY recently? What was your takeway?

Disclosure: No position