Sanofi Looks Overvalued At $41

Aug.30.12 | About: Sanofi (SNY)

Sanofi is the world's fifth largest pharmaceutical company and the largest in Europe. Its product line centers on diabetes, cardiovascular, thrombosis, metabolic disorders, cancer, central nervous system drugs (Lantus, Plavix, Lovenox, Multaq and Taxotere) and vaccines. In its current corporate form, the company has more than doubled profits and its dividend in the last eight years, earning approximately 9-11% return on equity. The company should still be able to grow profits and dividends 6-10% annually for the next 3 to 5 years as a result of:

(1) a growing portfolio of diversified products in the cardiovascular, diabetes and CNS disorders areas. Its highly successful diabetes drug, Lantus, a leading drug in the global diabetes drug market. Diabetes revenues should be bolstered by a Lyxumia which is expected to be submitted for review last this year.

In addition, it is a leading producer of vaccine products including pediatric, influenza, meningitis and booster vaccines.

(2) focus on R&D is resulting in a strong product pipeline. The company currently has approximately 60 molecular entities and vaccines in various stages of development including entries in relapsing multiple sclerosis and metastatic colorectal cancer.

(3) expansion into emerging markets and Japan. Sales in emerging markets should expand from 10% in 2011 to 35%+ in 2015. The BMP Sunstone acquisition increases its exposure to China and its population's rapidly growing demand for better healthcare. Acquisitions in Brazil and India will also add to the company's rapid expansion in the emerging markets. Finally, a joint venture with Nichi-Iko will provide exposure to the world's second largest drug market.

(4) an aggressive cost reduction program. A recent review of operations and subsequent actions should result in cost savings in R&D and SG&A. In addition, the synergies in the Genzyme acquisition should lead to significant cost savings.

(5) acquisitions, e.g. the recent purchases of Genzyme, BMP Sunstone as well as Zentiva [generic manufacturer in eastern Europe] and Chattem [consumer health care {Allegra}] should provide new sources of growth.

The Genzyme acquisition will be accretive to earnings as it significantly expands SNY's product pipeline and its presence in biotechnology

Negatives:

(1) several of its leading drugs going off patent [Lovenox, Plavix, Ambien IR, Taxotere]. This resulted in $2.2 billion in lost sales in 2011 and could impact this year's earnings by over $1 billion.

(2) there are manufacturing issues at Genzyme, which is currently operating under a consent decree imposed by the FDA. Noncompliance could result in additional costs.

(3) intense competition from the likes of Abbott, Amgen, Bristol Myers, J&J Pfizer, Lilly and the list goes on. In addition, it faces competition from small drug companies in certain markets.

(4) FDA approval. Even though the company has a strong pipeline of potential new products, a tough regulatory environment makes the approval process very difficult. Furthermore, if approved the FDA may still require labels with serious warnings.

This dividend growth rate combined with the stock's 4.5% yield provides an attractive total return for the High Yield Portfolio. SNY is rated A+ by Value Line and carries an 18% debt to equity ratio.

Statistical Summary

Stock Yield Dividend Growth Rate Payout Ratio # Increases Since 2004
SNY 4.5% 8% 66% 7*
IND*** 3.2 8** 41 NA
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Debt/Equity ROE EPS Down Since 2004 Net Margin Value Line Rating
SNY 18% 10% 3 16% A+
IND*** 14 15 NA 19 NA
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*SNY has only paid a dividend for nine years

**over one half of the companies in the industry don't pay dividends

***IND is the average of the Drug Industry as compiled by Value Line

Chart

Note: SNY stock made good progress off its March 2009 low, quickly surpassing the downtrend off its January 2007 high (red line) and the November 2008 trading high (green line). Long term the stock is in a trading range (the straight blue line is the upper boundary). Intermediate term, it is in an uptrend (purple lines). The wiggly blue line is on balance volume. The High Yield Portfolio owns a 50% position, having just sold one half of its position. The upper boundary of its Buy Value Range is $18; the lower boundary of its Sell Half Range is $45.

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http://finance.yahoo.com/q?s=SNY

Bottom line: The combination of an above average yield along with the company's earnings growth prospects makes SNY a potentially attractive investment. However, at current prices, we would not be a buyer of the stock. Long term investors may want to hold their positions. We have elected to Sell one half of our holding because we believe that at $41 a share, the stock is overvalued.

Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own SNY