Morningstar | BAYRY Updated Forecasts and Estimates from 15 Nov 2018
Bayer reported third-quarter results with earnings per share slightly exceeding both our and consensus expectations, but we don't expect any major changes to our fair value estimate based on the minor outperformance. We continue to view the stock as undervalued, with the investment community likely underestimating a strong litigation defense for Bayer against the over 9,000 cases claiming damages from glyphosate use. While an early glyphosate case (Johnson) went against Bayer, we expect Bayer's appeal to further reduce the $78 million in damages left from the initial ruling of $289 million. Despite the heavy litigation concerns, we remain confident in our wide moat rating for Bayer based on the company's strong positioning in both healthcare and crop science.In the quarter, total sales increased 2% after adjusting for currency, acquisitions, and divestitures with the pharmaceutical group providing the strongest growth. We expect continued strength from the drug segment with new indications for cardiovascular drug Xarelto (9% of sales) in coronary and peripheral artery disease to support a key pillar of growth for Bayer's drug sales. Beyond the drug segment, the crop science group posted minor growth on a constant portfolio basis with strong herbicide growth offsetting some inventory work downs in Brazil. Despite the legal issues surrounding glyphosate, crop science demand for glyphosate herbicides remains steady.
On the bottom line, increased interest expense and shares outstanding related to the capital needed to acquire Monsanto weighed on earnings per share, but we expect significant earnings growth in 2019 partly due to the June 2018 closing of the Monsanto acquisition (missing the high earnings in the early part of the 2018 due to the seasonality of the business). We expect the full year of Monsanto earnings in 2019 along with steady growth from the firm's portfolio will help drive earnings-per-share growth by over 20% next year.
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