Bayer: Speculative Value Beyond Litigation Pressures

Core Viewpoint - Bayer's Q2 2024 results were mixed, with strong performance in Pharmaceuticals but challenges in Crop Science, leading to a downgrade in stock valuation from Deep Value to Speculative Value [1][10] Financial Performance - Bayer reported total revenues of €11.1 billion for Q2 2024, a 3% increase from the consensus estimate of €10.8 billion [2] - EBITDA before special items was €2.1 billion, a 2% increase over the consensus estimate of €2.08 billion, while core EPS rose 13% to €0.94, outperforming expectations [2] - Pharmaceuticals division sales increased by 4% to €4.6 billion, exceeding consensus by €191 million, with EBITDA before special items rising 12% YoY to €1.32 billion [2] - Crop Science division faced challenges, with sales of €4.98 billion, just 1% above consensus, but a 25% miss on EBITDA at €524 million [2] - Consumer Health segment reported a 1% increase in sales to €1.46 billion, but a 6% decline in EBITDA to €314 million [2] Cost Management and Restructuring - Bayer is implementing a cost-cutting strategy targeting over €2 billion in structural savings by 2026, with a workforce reduction of approximately 1,500 positions [3] - Headcount has been reduced by nearly 5% YoY, focusing on eliminating bureaucratic layers and unproductive segments [3] Guidance and Outlook - Bayer reiterated its FY24 guidance, expecting group sales around €47.6 billion and an EBITDA margin between 22.5% and 22.6% [4] - The Pharma division's growth guidance was upgraded, while Crop Science is expected to perform at the lower end of sales and EBITDA guidance [4] Litigation Developments - Bayer settled 114,000 out of 172,000 glyphosate-related claims as of Q2, with a significant legal win in the "Schaffner vs. Monsanto" case [5] - The U.S. Third Circuit Court of Appeals ruled in favor of Bayer, which may lead to a Supreme Court review, potentially impacting ongoing glyphosate litigation [5] Long-term Growth Potential - Bayer plans to launch ten blockbuster agricultural products over the next decade, with total revenue potential exceeding €32 billion [6] - The company is focusing on innovative R&D, including new herbicides and digital tools to enhance farming practices [6] Valuation Update - Following Q2 2024 results, Bayer's fair implied share price is updated to €44, reflecting adjusted EPS expectations through 2026 [7][10]