BAYRY - Bayer Agriscience Shades Of Corteva

2023-05-16 12:36:04 ET

Summary

• Capitalizing on the promise of focused oligopoly-level businesses, in 2019, we bought Corteva stock when DowDuPont broke into three companies.
• Bayer appears to have bottomed out as its incoming CEO considers spinning off its agriscience giant focused on seeds, crop protection, and related services.
• Were this to happen, and with Monsanto’s problems behind it, we could envision a substantial return akin to the one we have experienced in Corteva.
• Also contributing to the promise of Bayer (and its contemporaries) is climate change, mandating that we adapt as growing conditions and seasons change.

I am a big believer in the power of global oligopolies as discussed in my Seeking Alpha article of 2017. In it, I stated, "When a few firms control the lion's share of a market we have an oligopoly. Their attraction is in the power they command with respect to dominating channels and setting prices and terms." I went on to explore oligopolies in various spaces that were, and continue to be, successful.

The Problem with Conglomerates

In a later article that SA published on February 12, 2022, I went on to discuss the oligopoly surrounding the global seed business, "The Big Three", including the USA's own Corteva ( CTVA ), and Germany's BASF ( BASFY ) and Bayer ( BAYRY ). In that piece, I observed that DowDuPont split into three companies setting up Corteva as a pureplay in agricultural sciences, because:

" Experts have observed that conglomerates have failed to live [up to] their promise and, by breaking them up, the component parts may do better."

Indeed, since the date of that piece through the close of business last Friday, CTVA has appreciated 12% outperforming all major indexes, generating alpha (incidentally, we are up 108% on our Corteva shares since we acquired them in June 2019 during the spinoff).

Lo and behold, news recently broke that Bill Anderson, who will take the reins as CEO of Bayer on June 1st, is considering such a split . He has stated that the "life sciences company" has three " amazing businesses " - pharmaceuticals, consumer health, and crop science. A nderson is undoubtedly aware that, once the most valuable company on the DAX blue-chip index, Bayer, is now worth only about what it paid for Monsanto with a market cap of about half that of Siemens ( SIEGY ) that is well-known for having executed successful spinoffs including that of Siemens Healthineers (SMMNY). Anderson should 'de-conglomerate' Bayer, in my opinion.

Two Frames of Reference

Ergo, we have two frames of reference as to what Bayer's breakup might mean for unlocking shareholder value: a) a comparison to Corteva that successfully detached from formidable DowDuPont, and b) a second comparison to Bayer's German cousin Siemens Healthineers that peeled away from its iconic parent.

However, before we do a scratch-pad comparison of those valuations, let's take a look at the financials of Bayer, the conglomerate, as they stand today. Here, the last four quarterly snapshots show: a) revenue, operating income, net income, and operating cash flow suggestive of a company that may have bottomed out and is coming back, supported by b) a balance sheet with recently improving liquidity and leverage.

Against this, MarketWatch reports that of the twenty professional analysts that cover the company, 9 have BAYRY as a "Buy", 3 as an "Overweight", 8 as a "Hold", with none giving the stock/ADRs an "Underweight" or "Sell". Their average price target is $19.79 which indicates an upside of 33% over its close on Friday.

Now, what about those comparative valuations as measured by P/Es. Again, as of Friday, BAYRY is trading a multiple of 7.43x whereas CTVA comes in at 19.33 and SMMNY at 26.52x. Against the more conservative Corteva benchmark, Bayer's aggregated parts could see hypothetical appreciation of 160%.

So, my high-low for price/market cap appreciation is a "low" upside of +33% based on the collective valuations of professional analysts of the company as a conglomerate, and a "high" upside of 160% based on the P/E of Corteva (still conservative as compared with Siemens Healthineers).

A Word About Crop Science

In language that is like that used by its contemporaries in crop science, " Bayer is committed to a world where biodiversity thrives in harmony with humankind. Where hunger and climate change are terms relegated to history books. Where farms are more sustainable, with plants that are more adaptive and resilient, to help improve life for families and communities." The company's "areas of focus" include:

• Digital Farming in which farmers, indeed countries, collect and process data to adapt/improve plants, treatments, and practices.

• Seeds & Traits combining the best genetics, traits, and blends - aligned with growing conditions - to increase sustainable yields and make the job of harvesting easier.

• Crop Protection from weeds, diseases, harmful insects, and fungi that rob plants of water, sunlight, and nutrients, which can have a devastating impact on food production.

• R&D Innovation driven by farmers' needs for integrated, effective, and sustainable solutions to help them combat crop threats and maximize productivity - all while reducing their environmental footprint and protecting the earth and its inhabitants.

• Climate Change attuned to the impact of increasingly extreme weather conditions - drought, severe heat, flooding, or other shifting climatic trends - while decarbonizing agriculture and farming practices.

And, As to Climate Change

It's fitting that Bayer highlights climate change because researchers around the world - including the likes of NOAA and NASA here in the US - offer acres of longitudinal data confirming that the ravages of the human-contributed phenomena are upon us. We can read about this, and see it for ourselves, in information pouring in from around the world:

• From Europe - Where 40 towns in Italy have already rationed water as the Po River dries up, Lakes Como and Garda decline, and Alpine glaciers recede.
• From Africa - Where 20 million people, including 2 million displaced, in Kenya, Ethiopia, Somalia, Uganda, and South Sudan are at risk from the severe drought .
• From Latin America - Where climate change is affecting migration patterns .
• From Australia - Where rising temperatures have brought on more drought and wildfires and have created risks for their coastlines and the Great Barrier Reef.
• From Asia - Where scorching temperatures are stretching from India across China and into Southeast Asia, causing severe public health challenges.
• From the Poles - Where sea ice and glaciers are melting at alarming rates , the latter "fueling" the rise in ocean levels, putting coastal areas around the world at risk.
• In North America - Whipsawed by droughts and floods, and where we can see no better evidence of the economic consequences of climate change than what hurricane destruction in Florida has done to the availability and affordability of insurance .

Other than questioning the motives of the esteemed organizations and scientists who study these matters, there are those among us who are quick to point out that freezing weather and heavy snows "prove" that we are not warming up and/or drying out, that there is no threat from climate change. Unfortunately, these folks do not understand that extraordinary weather "events" are part of the pattern of climate change that scientists have long been warning about.

So here we have Bayer, one of three publicly-traded agriscience giants that, in the footsteps of Corteva, might greatly benefit from a thoughtful breakup but, even if it doesn't, is now poised to deliver shareholder value in a world looking to it - indeed, depending on it - to help us meet our agricultural challenges in a changing environment.

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