Upgrade of Bayer’s Rating by BofA Securities

BofA Securities recently upgraded Bayer’s (ETR:BAYGN) rating from ‘underperform’ to ‘neutral’, reflecting a favorable outlook on the company’s litigation and business prospects.

Price Objective

The price objective has increased to EUR 31 per share (ADR $8.55) from EUR 21 (ADR $7.60), driven by a reassessment of Bayer’s litigation provisions and optimism regarding key legal challenges related to glyphosate and PCB.

Favorable Ruling in Glyphosate Litigation

The analysts noted a recent favorable ruling in Schaffner v. Monsanto (NYSE:MON), creating a circuit split on federal pre-emption, suggesting Bayer may not be liable in state litigation regarding glyphosate’s cancer risk.

BofA estimates a 40-50% chance the U.S. Supreme Court (SCOTUS) will take up this case, with greater than 50% likelihood of a favorable outcome for Bayer if accepted. A positive ruling could resolve the glyphosate litigation and remove a EUR 6 billion provision, about 25% of Bayer’s valuation.

SVEC Cases and Litigation Environment

Bayer also secured a favorable appeal ruling in the Sky Valley Education Center (SVEC) cases. The Washington State Supreme Court’s decision on reviewing the Erickson case is expected by October 8, 2024. If not reviewed, it would be a significant win for Bayer, potentially concluding the SVEC litigation. Despite ongoing personal injury lawsuits related to PCB in other states, the litigation environment for Bayer appears to be improving.

Adjusted Valuation Model

Due to these developments, BofA has revised its valuation model for Bayer, reducing the additional litigation provision from EUR 10 billion to EUR 5 billion, which influenced the increased price objective. The new price target uses a 6x multiple on FY25 estimated earnings per share (PE), up from the previous 5.5x.

Bayer’s Diversification and Market Outlook

BofA characterizes Bayer as a well-diversified life sciences company with significant Pharma and Crop Sciences operations and a smaller Consumer division. Despite facing challenges, particularly in Pharma performance, the positive litigation developments are expected to positively affect Bayer’s share price over the next year.

Valuation Components

Analysts emphasize two main factors affecting Bayer’s valuation:
1. A reduction in litigation provisions presents a potential EUR 10 per share net present value (NPV) upside, about 40% of the valuation.
2. The sum-of-the-parts (SOTP) valuation supports the EUR 31 target, with varied EV/EBITDA multiples reflecting cautious expectations for Pharma, higher for Consumer Health, and Crop Sciences, factoring in a 20% conglomerate discount. Each additional multiple on EV/EBITDA could add roughly EUR 3 per share to the NPV.