Quick Pitch: Long on Sanofi (NYSE: SNY)

(This is a highly-abbreviated version of a full write-up pulled from the SumZero community)

Source: Hedge Fund
Location: Southeastern USA

Recommendation: Long
Current Price: €56.00
Target Price: €70.70
Timeframe: 2 Years+

Quick Thesis
The market views Sanofi as a large European pharma company with a patent cliff. I believe the stock will be revalued due to the change in business mix, geographical mix, and the lack of patent exposure past 2012. Sanofi has valuable franchises in Generics, Consumer Products, Animal Health, Vaccines, and Genzyme that have sustainable cash flows. The company's geographic mix is heavily weighted towards rapidly growing Emerging Markets where Sanofi has excellent legacy market position.

Key Points
Sanofi offers an attractive long-term value opportunity for patient investors. This is a stock that has not participated in the recent rally and still offers an attractive entry point. Sanofi is currently valued at 9.6x 2012E EPS, 6.3x EBITDA and offers a 12% expected FCF yield. The stock offers an attractive dividend yield of 4.77%, a payout ratio of approximately 40%.

Sanofi management is committed to growing the dividend with a targeted payout ratio of 50% by 2014. Earnings are expected to be down 12%-15% in 2012 due to the patent expiry of Plavix and Avapro. 2012 is the “patent cliff” for this company and earnings should grow thereafter. Investors penalize Sanofi because they view it is a “French pharmaceutical company.” In reality, Sanofi’s cost structure and business mix has been aggressively re-shaped over the last several years by CEO Chris Viehbacher (a native of Germany and Canada).

Europe has been a difficult place to do business for quite a while, even before the recent sovereign debt concerns. Due to limited growth prospects in their home markets, many European multinationals invested early and aggressively in Emerging Markets. Because of this dynamic many European multinationals have excellent legacy positions in Emerging Markets versus U.S. multinationals. Sanofi is a prime example. In the fourth quarter of 2011 Western Europe accounted for 26% of sales and fell at a 2.6% rate (constant exchange) while Emerging Markets accounted for 31% of sales and great at an 18.7% rate (constant exchange).

Conclusion
As Sanofi moves through the “generic trough” of 2012 I believe the stage is set for the stock to be revalued. A conservative one-year target for Sanofi is €70.70 or $46.10 for the ADR. This equates to a total return of 31% over one year and is based on the stock trading at 11.5x 2013 EPS – hardly an aggressive target. I believe that the downside risk to Sanofi is 7.5x 2012 “trough” EPS or €43.50 or $28.40 on the ADRs. The risk reward-proposition using extremely conservative multiples is approximately 2 to 1. Moreover, if the stock trades at the trough level and I am dead wrong on the growth story an investor would still break even on a total return in several years on the dividend alone. I certainly do not expect this to happen but it illustrates that an investment in SNY has little risk of “permanent impairment”.

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