BAYZF - Bayer Stock: Good Value For Money

2023-10-27 14:46:40 ET

Summary

• Bayer's stock is undervalued and offers potential for long-term recovery.
• Revenues have been quite strong for a while. But earnings have not shown sustainable growth.
• Key growth stimuli include resolving glyphosate issues and new drugs, but risks include litigation and debt.
• It is likely the recent set of results is only a temporary decline.

Bayer's ( BAYZF ) ( BAYRY ) stock has been facing a lot of pressure for a while. The company's earnings results have been disappointing for investors. I agree that it might be psychologically pleasing to own the stock of an overvalued company that has been recording very high earnings and revenue growth for a few quarters. However, that usually means that investors buy a stock without a big margin of safety. So, their gains might be limited. The situation with Bayer is exactly the opposite. The company might not be going through its best days but investors might benefit from its long-awaited recovery. In this article, I would like to show why Bayer is a value stock. But I will also show you any potential downside risks.

Bayer earnings

A lot has already been written about Bayer's most recent earnings. So, I would just mention the key points. I would focus on the first half of 2023. Overall, the results were not excellent. This is especially true of the company's free cash flows, core EPS and EBITDA. But the net sales also decreased - the fall totaled 7%.

None of the departments did particularly well. But as can be seen from the excerpt below, the worst performance was shown by the crop science part of the business. From all the regions Bayer operates in, the Americas struggled the most.

The crop science revenue decline happened due to the fact glyphosate sales dropped by EUR 1.8 billion. The demand for glyphosate-based herbicides decreased due to dry weather. This simultaneously affected the volumes sold and the prices. But dry weather is not the only problem here. Bayer is facing lower demand for herbicides containing glyphosate. This has been caused by thousands of lawsuits in the last several years. To decrease the litigation risks, Bayer began replacing products with herbicide alternatives this year.

Without that change, the Group's revenues would have stayed even.

But still the whole situation does not look inspiring. In other words, there is not much growth happening right now. But it is worth looking at the company from the angle of its historical earnings and revenues in order to see where we are now.

Annual revenues and net profits history

From the graph and table above we can clearly see that 2016 was the worst year for the company in terms of revenues. Right now things look much brighter for the company's sales.

The company's basic EPS and net profits are not catastrophically low either. I also took the TTM (Trailing 12 months - the past 12 consecutive months of a company's performance data, that's used for reporting financial figures) data. If we compare the TTM to the previous reporting periods, we will see that years 2021 and 2020 were much worse. But Bayer's shares did not trade as low as they are trading now. I will cover the valuation ratios in some more detail later on.

If we look at the company's earnings and revenues tables and graphs below, we will see that they keep rising and falling. In other words, there is neither an upside trend, nor a downside trend.

Quarterly earnings and revenues

All that suggests, in my opinion, that Bayer is not struggling right now. We cannot say that the company's earnings are at all-time lows. At the same time, it is hard to say that Bayer has been consistently raising its profits throughout history. But its revenues have been increasing since 2017.

Key growth stimuli

I decided to analyze the key possible growth stimuli for Bayer Aktiengesellschaft.

First of all, it is highly likely the company would solve the problem with glyphosate-based herbicides in the near future. Bayer would eventually replace its products. Moreover, the demand for glyphosate products can still rise due to the changing weather conditions.

The demand for soybean, cotton and vegetable seeds was also weak. But that can change as well. The demand for agricultural products is quite volatile. Bayer's corn seed and traits business, in contrast, did very well. Sales jumped by 11% in the second quarter and that trend can continue in the future.

Some of Bayer's greatest growth stimuli are its new cancer medicine Nubeqa and the new kidney drug Kerendia. These also helped the company to compensate for the poor results in the second quarter. It is also quite possible the demand for these drugs can keep rising.

But the best department for Bayer in terms of growth is its consumer health unit, the company's smallest division. The demand for the unit's Bepanthen skin creams as well as its allergy and cold products remains high. Thanks to these products, the division's total revenue is expected to grow by 5% this year.

Risks

As I have mentioned before, the company is facing problems because of the litigation suits, and the crop science department's decline. However, these pressures are likely to only be temporary.

However, Bayer cannot boast of a very high credit rating. It is rated BBB+ by Fitch and BBB by S&P Global. In short, the company is quite indebted despite its investment-grade credit rating, whilst its recent earnings were not brilliant in my view.

Fitch expects Bayer to have " negative FCF and EBITDA net leverage at the 3.0x negative sensitivity ." The company has EUR 7.4 billion in short-term debt maturities and might have to make litigation payments in the near future. At the same time, at the end of 2022, Bayer had EUR 9.8 billion in cash as well as EUR 4.5 billion in undrawn committed bank facilities maturing in 2025. This money should cover Bayer's short-term debt, which means that the company is not facing any liquidity problems right now.

Bayer has a strong presence in Europe. Unfortunately for the company, the EU's key macroeconomic indicators are declining at a faster rate than those in the US. Then, obviously, there is a high risk of a recession due to many central banks' hawkishness. But even if there is no long-term economic downturn, the high interest rates mean it will be harder for Bayer to service its debt. However, all these risks are already factored in the stock price, it seems.

Valuations

In spite of the key risks, we can still consider Bayer to be good value for money. According to GuruFocus, BAYZF stock should trade for $61.61 per share.

I have mentioned above that Bayer's earnings are not extremely low right now, whilst its stock price is at multi-year lows. There were times when Bayer's earnings were negative but its stock only traded as low back in 2015.

The company's P/B ratio does not suggest the stock is dirt cheap, however. It is just above 1, meaning good value for money but not extreme cheapness. At the same time, there was a decrease in the value of the company's goodwill due to glyphosate lawsuits, which obviously decreased the company's book value.

Generally, I believe Bayer's stock is really cheap right now.

Conclusion

Overall, I would say that Bayer's stock is substantially undervalued. The company's earnings have recently been facing some pressure. Bayer is also indebted but has more than enough cash reserves to pay its short-term debt. At the same time, there is no guarantee the company's stock will start rising in value immediately after you buy it. The recovery process might last for a while. But patient investors might be rewarded, I think.

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