BAYRY - Searching For Potential German Portfolio Winners

2023-03-24 07:00:00 ET

Summary

• With 2-5 year U.S. Treasury securities currently yielding 3-4%, it makes great sense to search for equities that offer us both a competitive dividend with possible upside potential.
• Add to that diversifying one's portfolio with top-rated equities in the world's fourth-largest economy.
• The two companies discussed below are household names around the globe.

Introduction

The two companies discussed here are currently trading at reasonable multiples with current dividend yields of 2% and over 3%.

Bayer AG ( OTCPK:BAYRY ) at its current price of $15.00 is currently yielding 3.40% with a forward P/E ratio of 7x and Deutsche Bank ( DB ) at $10.60 generates a current yield of 2.00% with a forward P/E ratio of 5.5x.

Both companies are currently dealing with well reported issues, whether company unique or industry-wide that have negatively affected their current stock price. Below we shall discuss these issues and see why they may be temporary which should offer investors the potential from an upward stock re-evaluation in addition to the current as well as possibly increasing levels of dividends and stock buy-backs.

Bayer AG

This Leverkusen, Germany based company which was founded in 1863 is known around the world for both its Bayer Aspirin and Alka Seltzer brands. The company currently operates in three divisions, Pharmaceuticals, Consumer Health, and Crop Sciences. There a several reasons why I believe this company is currently well suited for the investor with a 12-18 months' time horizon. First, the company appears to be in the process of putting a disastrous acquisition it made in 2018 behind it. That year it acquired Monsanto Co. for $63 Billion. Monsanto brought with it a well-known product, Roundup. In 2015, the International Agency for Research on Cancer declared Roundup's active ingredient Glyphosate a possible human carcinogen.

While the U.S. Environmental Protection Agency had opined that Glyphosate was safe, several U.S. States and local governments began to restrict or even ban the product entirely. Since then, the company's attorneys have been working triple overtime defending thousands of lawsuits by plaintiffs who claimed that the product caused the development of Hodgkin lymphoma. In June 2020, Bayer settled a major part of the litigation for $10.9 billion . As of February 2022, 107,000 of the 138,000 claims were settled or found to be ineligible. In September 2022, Bayer won its fifth consecutive trial over claims that Roundup causes cancer.

While it may be too early for the company to declare victory and put this issue behind it, I believe it is safe to argue that the company is in the final stages of dealing with this most unfortunate problem thus lifting a major cloud that has been hanging over the company's reputation and performance over the past five years.

On the more positive side of things, the company has appointed Bill Anderson as its new CEO effective June 1. He will replace Werner Baumann who is leaving his position almost one year ahead of the expiration of his contractual term. Bill Anderson was a senior executive with Roche Holdings AG ( RHHBY) and CEO of Genentech which today is 66% controlled by Roche. Investors have held Mr. Baumann responsible for the Roundup fiasco and his early exit is thought to be a very positive development. What then is the market expecting form Bill Anderson? First and foremost is to regain the trust of the investment community which has been lost over the last several years. Since the Monsanto acquisition, Bayer's market cap has declined by over 40%.

One potential possibility is the break-up of the company which is demanded by a number of its institutional holders. A spin-off of the consumer health unit is thought to be one strategy to regain the trust of investors by removing the conglomerate discount, similar to what Johnson & Johnson ( JNJ ) is currently in the process of doing.

Another positive development is Bayer's announcement on March 9 that it will invest $1 billion on drug research and development in the U.S. Its goal is to double U.S. revenues by selling its drugs there directly instead of partnering with other U.S. Pharmaceutical companies. Two of Bayer's current best-selling medications are a cancer drug, Nubeqa, and a kidney drug, Kerendia. Its pipeline includes experimental stroke drug Asundexian and Elinzanetant, a women's health drug.

From what can be ascertained at the current time, Bayer continues to be severely depressed given its recent serious legal issues that appear to be on the way of being resolved. The market has yet to focus on the incoming new leadership that I expect to begin to show results commencing this calendar year.

Deutsche Bank

Deutsche Bank has made major headway since my June 17, 2021 Seeking Alpha article titled Deutsche Bank: The Worst Appears To Be Over although its current stock price of around $10.00 does not appear to reflect that progress. The bank's successful rebound can be primarily attributed to its CEO, Christian Sewing who was appointed to his position in April 2018. On May 27, 2021 he announced that the bank's overhaul plan was ahead of schedule and promised an era of more sustainable profits. That announcement has proven to be on target.

At this point, I cannot add much beyond referring readers to the excellent SA article of March 20 by IP Banking Research titled Deutsche Bank: All About Share Buybacks At 0.35x Tangible Book Value. But let me focus on the specific reasons why I submit that an investment in this bank at current levels appears to be an opportune time to benefit from a continuing earnings rebound coupled with the bank's intent to reward shareholders with both dividends and expected buy-backs.

The fact that Deutsche Bank can now be referred to as a Blue Chip investment again was confirmed on March 15 when CEO Sewing announced that the German lender has seen incoming deposits over the last three to four days as customers fly to quality. He continued to state that "we should be very clear that there is in my view no similarity of events on the West Coast and European Banks.

In that regard, Bank of America ( BAC ) recently noted that "European banks did not assume rapid deposits inflows to remain stable permanently, and therefore did not invest them out the curve. " Therefore, Deutsche Bank in particular and European banks in general, are unlikely to experience maturity mismatches as some of America's troubled banks are now experiencing.

As far as any mergers or acquisitions are concerned, Mr. Sewing stated that the bank's focus has been on fixing the bank from within and that "there was still lots to do." Under Sewing's leadership, the bank has been in a position of providing conservative guidance and outperforming its guidance on a regular basis.

With its recent return to profitability, the company's received a vote of confidence from Moody's when its credit rating was upgraded to A1 from A2 on October 12, 2022 after it had carried a A3 rating as recently as 2021. The bank's current and projected performance is confirming Moody's decision to be appropriate. Moody's stated that Germany's largest lender had made progress in meeting medium-term targets, "in particular by being able to sustain improved, yet still relatively modest, profitability."

Final Thoughts

I am recommending that investors may take a full position at Deutsche Bank at this time. At its current price of $10.60, it is down from its recent 53 week high of $13.57 entirely, I believe, resulting from the current global banking Tsunami. Thus, the shares can be expected to rebound to its recent higher level and end this calendar year at a valuation in the mid-teens. At this point, the only risk that may delay this positive projection is a wider and unexpected disruption within the global banking industry that would lead to bankruptcies and forced mergers.

Bayer, on the other hand, is still in the early stages in its attempt to again gain the trust of the investment community. Once, its new senior management team is in place, it may take at least two quarterly reporting periods before investors may be comfortable with the strategy that the new team is putting into place. Management's projections at its quarterly reports will be the driving factor of the stock's performance over the next several months. Therefore, I recommend entering this investment with a 25% commitment at this time and then adding to the position as we learn more about the company's success in bringing the Roundup lawsuits to its final conclusion, the possible spin-off of its consumer health unit, as well as its dividend policy going forward. The risk here would be that the incoming CEO does not make the changes that are necessary and that investors are expecting. This is an unlikely scenario given Mr. Anderson previous accomplishments.

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