EUR 850.00 For Business Accounts Only

Morningstar | Bayer Announces Cost Cuts and Divestments Along With a High One-Time Cost

Bayer has announced plans to restructure its operations by cutting costs and selling noncore assets, which we don't expect to affect the firm's wide moat. But high one-time costs related to the moves suggest a minor decrease in our fair value estimate. We should have more details after the company's capital markets day on Dec. 5 and will update our DCF model then. The one-time costs of over EUR 4 billion associated with the strategic moves is higher than our current model, suggesting a fair value impact of close to 2%-4%. Even after a potential minor fair value decrease, we continue to view the stock as undervalued, with likely too much concern placed on the ongoing glyphosate litigation.

Despite the high costs of restructuring the business, the increased focus on core segments is strategically sound. Divesting animal healthcare products and several consumer healthcare products should allow Bayer to focus on the core divisions of human branded drugs, core consumer products, and crop sciences. We expect this focus will help with innovation, particularly in the pharmaceutical segment, where research and development are a core element for the company's wide moat. Additionally, we expect the divestments to carry solid valuations based on strong expectations in the animal and consumer healthcare markets.

Beyond the increased focus, Bayer's decision to cut 12,000 jobs should help the firm support strong margins over the long term. The company's 2022 guidance of EBITDA margins of over 30% by 2022 would move the company closer to its peer group. However, we had expected Bayer would drive returns close to this mark already and are a little surprised by the heavy amount of cost cutting needed to get to these margin levels.