Is Bayer a bargain stock despite the litigation surrounding Roundup?

The German chemicals group Bayer’s lawsuits over its Roundup weedkiller could throttle its profits. But is the gloom overdone? Matthew Partridge reports

“Only hours away” from another jury trial over its weedkiller Roundup, Germany’s Bayer has secured a postponement to allow room for “escalating settlement talks” to continue, reports Laura Kusisto and Ruth Bender in The Wall Street Journal. 

This has raised hopes that Bayer may be close to settling claims related to allegations that Roundup causes cancer, which have already caused Bayer to lose three individual cases, leaving it liable for a total of $190.5m in compensation. A fourth adverse verdict could have handed the 42,000 plaintiffs involved so far “additional ammunition in settlement talks that have dragged on for months”.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

A settlement won’t come cheap, says Fortune. Experts believe that settling the “tens of thousands” of claims, which could eventually rise to as much as 85,000, could cost around $10bn, with some even putting the costs at $13bn. 

The lower estimate would imply $8bn to resolve current cases and $2bn set aside for future claims, including those related to diseases such as non-Hodgkin’s lymphoma “which can take years to diagnose”. There’s also the problem of trying to simultaneously negotiate with the various groups of plantiffs’ attorneys, “each with a sizable inventory of cases”.

Advertisement
Advertisement - Article continues below

The fact that Bayer’s shares rose by 4% on the news of the postponement suggests there is a risk that shareholders’ expectations “are getting carried away”, says Chris Hughes on Bloomberg. There remains a “real possibility” that the “saga” endures for longer than investors have anticipated if talks between the two sides break down. Indeed, given that Bayer still believes that Roundup doesn’t cause cancer, it could simply decide that it would be better off taking a chance on a trial if an acceptable figure cannot be reached.

The positive scenario

However, if a deal does end up being signed then shareholders could stand to do very well, as the chemical giant currently still trades at a “substantial discount” to its peers. The gap is worth “much more” than the settlement costs being discussed. 

Just getting to a valuation matching its cheapest counterparts “would add about €20bn of market value, after deducting the estimated cost of ending litigation”, while a move toward the average of its peer group would see the market value rise even higher.

Shareholders may be relieved at the “fairly modest” settlement, say Ed Cropley and Aimee Donnellan on Breakingviews. Still, they are still entitled to be “hopping mad” at the fact that Bayer got itself into the mess in the first place by buying Monsanto (which originally developed the drug) for $66bn in 2018. A Bayer investor who bought shares when the deal with Monsanto was completed would still have lost nearly 20% of their stake today, while those who invested in other drug companies would have made big profits. Bayer CEO Werner Baumann “has a lot of work to do” to ensure that Bayer’s shares close the gap.

Advertisement

Recommended

Visit/investments/funds/investment-trusts/600797/continental-blend-baillie-gifford-european-growth-trust
Advertisement Feature

Continental blend: the case for European companies

SPONSORED CONTENT If being able to find stocks with unlimited upside but limited downside is one of the most important tenets of successful investing,…
19 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600823/dont-write-off-european-stocks
European stockmarkets

Don’t write off European stocks

The Eurozone economy may have slowed to a crawl, but a return to earnings growth has given investors in European stocks hope.
16 Feb 2020
Visit/economy/600689/how-putins-cronyism-is-strangling-russia
Economy

How Putin's cronyism is strangling Russia

Russia's vast population and wealth of resources should be boosting growth. There’s one man holding it back: Vladimir Putin
27 Jan 2020
Visit/investments/stockmarkets/european-stockmarkets/600692/can-europes-stockmarket-rise-keep-going
European stockmarkets

Can Europe's stockmarket rise keep going?

The eurozone’s stockmarkets had an excellent 2019. But there are serious doubts about their ability to repeat the performance in 2020.
24 Jan 2020

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/currencies/600842/eur-usd-euro-slide-against-us-dollar
Currencies

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600811/three-overlooked-stocks-to-buy-now
Share tips

Three overlooked stocks to buy now

Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, portfolio manager at the AVI Global Trust, highligh…
17 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020