Bayer Without Monsanto

| About: Bayer A.G. (BAYRY)

Summary

Bayer just released Q2 2016 results.

A highly diversified pharma, consumer healthcare and crop science company.

Probably deserves its market cap valuation.

The high premium being paid for Monsanto puts me off though.

Whilst Bayer (OTCPK:BAYRY) has been a hot topic in recent months due to its ongoing acquisition attempt of Monsanto (NYSE:MON), I wanted to cover Bayer with the latest financials to determine if it's a worthy investment candidate. Bayer Management just gave a big investor presentation today (20th September) that gave a reasonable insight to each part of the Bayer machine which of course includes its plans for Monsanto.

What does Bayer exactly do?

Given the constant talk of Monsanto, one might think Bayer is primarily a seed or agri-science business but it is also a big player in consumer healthcare and pharmaceuticals. In fact, 2015 Sales for it healthcare business came to nearly 21.5B EUR, dwarfing Crop Science Sales of 10.5B EUR. If it can acquire Monsanto then Crop Science Sales will be on a par with the Healthcare side of the business at about 23B EUR.

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The healthcare side of the Bayer is very high end. It holds the number 1 position in global consumer healthcare sales, beating a consumer healthcare lineup of big names like GlaxoSmithKline (NYSE:GSK), Sanofi (NYSE:SNY), Johnson & Johnson (NYSE:JNJ) and Reckitt Bensicker. Here is a slide from the earnings call that summarizes its portfolio of consumer healthcare brands, each of which generate at least 100M EUR annually.

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Consumer healthcare is a great business that requires relatively little R&D to support steady but reliable growth. Only about 270M will be spent in 2016 on consumer healthcare R&D with reference to 6B EUR worth of sales in 2015.

On the pharmaceutical side, Bayer has developed market leading positions in cardiovascular treatments, retinal treatments, oncology treatments and women's health treatments. Recent growth has been impressive. Whilst margins and growth are impressive, Bayer will spend 2.5B EUR in 2016 in pharmaceutical R&D with reference to about 15B EUR worth of 2015 sales.

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And then to the crop science. Bayer is the 4th largest crop science company in the world, just behind Monsanto.

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The EBITDA margins for this business are fairly strong, running at about 20-25%. R&D spend is about 10% of Crop Science sales.

Valuation

The market has big concerns that the proposed merger with Monsanto won't happen. The Monsanto share price has fallen back to $100 in recent days despite Bayer's $128 per share offer of last week. The market simply thinks this deal won't happen.

So for valuation, I actually won't consider the impact of Monsanto. I personally like to use a discounted cashflow approach to valuation.

Free Cashflow came to about 5BEUR for the ttm to June 30 th 2016.

Using a long term growth rate of 3% and a hurdle rate of 8%, I estimate the discounted cashflows are worth 95B EUR.

Bayer has become quite an acquisitive company and has racked up a bit of debt. It has a big balance sheet deficit of 28.5B EUR that I define as Current Assets less Total Liabilities.

So from a business owner perspective, I value the future cashflows at 95B EUR today less the current balance sheet deficit of 28.5B EUR. I think the fair value of this business is about 67B EUR.

The market however values the business at 77B EUR. So I think the business is 15% over-valued but there are some good reasons for this premium:

  • Highly diversified conglomerate
  • Fast growing pharmaceutical business
  • Stable and dominant healthcare staples business with reliable growth
  • Powerful position in crop science market regardless of outcome with Monsanto
  • 2.8% dividend yield

Conclusion

I will give Bayer a miss. It's a tempting business but I see better value elsewhere. Also, if the deal closes, Bayer will have paid a big premium for Monsanto which will detract from the value of the business.

If the price comes down to 85EUR I would consider it a good fair value purchase since it is so diversified and I see its products enduring for a very long time to come.

Here's my current target list of "value" candidates.

TICKer

MktCap $B

Curr Assets-Tot Liabilities $B

DCF Value $B

At Growth

Price/(DCF+CA-LT)

EBAY

35

0

45

3%

78.71%

EAT

3

-2

5

3%

79.47%

BA

80

-26

124

3%

81.65%

ORCL

163

0

197

2%

82.75%

AMGN

127

-2

153

3%

84.16%

CSCO

156

16

167

2%

85.49%

MSFT

441

30

477

3%

87.01%

ETN

29

-8

41

3%

87.15%

INTC

173

12

185

2%

88.03%

QCOM

92

15

90

2%

88.04%

AAPL

605

85

600

1%

88.30%

PYPL

47

4

48

3.5%

91.29%

TGT

39

-14

57

3%

91.65%

MRK

167

-25

200

3%

95.43%

GILD

104

0

108

-5%

96.75%

GOOGL

535

75

457

4%

100.51%

HON

87

-12

98

3%

101.59%

PFE

202

-60

253

3%

104.85%

DHR

53

-15

65

3%

106.41%

BIIB

66

-3

62

3%

111.40%

JNJ

320

10

276

3%

111.99%

SJM

16

-7

20

3%

122.71%

MMM

108

-10

97

3%

123.51%

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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