Sanofi Is the Best Value in the Big Pharma Space

By: SumZero Staff | Published: July 03, 2012 | Be the First to Comment

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(This is a highly-abbreviated version of a full SumZero report republished with the author's consent)

Contributor: Kevin Clay.
Firm: Fraser Kearney Capital. Hedge Fund.
Location: Toronto, Canada.

Recommendation: Long Shares of Sanofi-Aventis (NYSE: SNY)
Timeframe: 1 to 2 Years
Recent Price: $38.00
Target Price: $50.00
Strategy: Value

Disclosure: The author of this report had an active position in this security at the time of its posting.

Quick Thesis:
Sanofi is trading at the same price it was 12 years ago. Over that period the only return has come from its meaningful and growing dividend yield. Going forward, the company is well positioned and valued to offer both significant dividend yield, dividend growth, and capital appreciation.

The pharma sector in general has been beaten up. However, within pharma, Sanofi trades at a meaningful discount to its peer group. A discount that is not justified, and in our opinion is mainly due to:

a) the company emerging from an earnings trough as older patents have rolled off, and
b) all things "Euro" trading at a discount.

The former is unrelated to the future, and the latter ins not justified as Sanofi is truly a global company with only a quarter or so of sales coming from Western Europe.

Sanofi trades at roughly 10x earnings. It's free cash flow is roughly equivalent to its earnings, offering a free cash flow yield of ~10% , with an EV/EBITDA multiple of ~7x, and a juicy, sustainable, growing dividend yield of 4.6% on a low payout ratio.

Geographic diversification and a global footprint insulate the company from currency and "event risk", and given the nature of its products, is not a "discretionary" purchase. Of significant note, approximately 30% of Sanofi's revenue comes from emerging markets, more than any other global large cap company.

The company has plenty of call options in the form of new drugs in the pipeline, and spends about USD $6 Billion on R&D. Sanofi has 6 drugs in registration, 12 in Phase III, and another 43 in Phase I and II.

Our analysis indicates there is over 50% upside to the share price from current levels (with some not-too-unreasonable DCF scenarios indicating as much as 100% upside), although it would likely take several years to close this gap to intrinsic value.

We believe the company is currently priced for a a perpetual (~3% YoY perpetual sales decline), where has the company should be able to achieve positive 4-5%. Put another way, we think the stock is pricing in that EBITDA will be half of what the Street estimates imply it will be in 10 years, and lower in absolute terms from today's EBITDA.

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