Sanofi-Aventis is a “Large Pharma” company, with a focus on oncology, cardiovascular disease, central nervous system disorders, diabetes, and vaccines. The company made it to the idea pipeline as I reviewed 5-star wide-moat rated company by Morningstar.
SNY currently trades at $33-34
1- Business Performance Risk (-) and intrinsic returns (=)
SNY’s free cash flow is strong but its returns are low. These are however somewhat “artificially” low as SNY has been very acquisitive in the past and had to book a high level of intangibles on its Balance Sheet. However the low returns would either be the sign of low returns of (more likely) a sign of overpaid acquisitions over the years. In general the management seems to be more concerned about growing through acquisitions that have created doubtful value vs. redistributing cash… a red flag for me!
SNY’s intrinsic returns could break down as follow (if it were not doing acquisitions every other year!):
- Dividend: 3.3% with a dividend payout ratio of 45%
- Organic growth: 2% (to be kind), financed using another 15% of earnings (on the basis of a “normal” ROE of 15%)
- Given the current earnings yield of 9.4% the remainder 40% of earnings could lead to buybacks worth ~4% of the company’s stock (not what management has done to date)
Total potential intrinsic returns: ~9%, not really great
2- Balance Sheet Risk (+)
No real balance sheet risk, until SNY loads up on debt to continue its acquisition binge.
3- Valuation Risk (+)
SNY’s valuation seems fairly attractive with a P/E of 10.6x
Conclusion
I will not perform a company analysis of SNY as I have doubts about the business going forward with very little growth and a management that is focused on doing acquisition to keep growing vs. managing to get more cash back to shareholders.
While the valuation could leave some margin of safety I don’t think the will create enough returns organically to make me interested.
You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.
Have you looked at SNY recently? What was your takeway?
Many happy returns,
Ben
SNY currently trades at $33-34
1- Business Performance Risk (-) and intrinsic returns (=)
| Metric | Status |
| FCF / Sales | Last twelve months: 21%, in line with performance over the previous years, ranging between 18% and 24% with a few exceptions (4% in ’02!) |
| ROE | LTM: 12.5% higher than the average over the last 5 years of 9.2% and at the high end of the range over the last few years of 8%-12% |
| ROA | LTM: 7.4%, higher than the average over the last 5 years of 5.4% |
| Revenue Growth | Revenue growth over the last 4-5 years (post the Aventis acquisition) has been low, in the 3-4% with declines in 2007 – 2008 |
| Cash distribution to shareholders | Dividend yield: 3.3% The company has bought back 3% of its share over the last 5 years (cumulative) Management “uses” cash to do acquisitions, spending $15Bn in 2004, 6Bn last year and now making a bid for Genzyme, for over $18Bn |
SNY’s intrinsic returns could break down as follow (if it were not doing acquisitions every other year!):
- Dividend: 3.3% with a dividend payout ratio of 45%
- Organic growth: 2% (to be kind), financed using another 15% of earnings (on the basis of a “normal” ROE of 15%)
- Given the current earnings yield of 9.4% the remainder 40% of earnings could lead to buybacks worth ~4% of the company’s stock (not what management has done to date)
Total potential intrinsic returns: ~9%, not really great
2- Balance Sheet Risk (+)
| Metric | Status |
| LT Debt / Equity | 0.13x |
| Current Ratio | 1.7x |
3- Valuation Risk (+)
| Metric | Status |
| Cash Return | 9.3% |
| P/E | 10.6x, well below the company’s 5-year average of 23x and below the current industry average of 12.4x |
Conclusion
I will not perform a company analysis of SNY as I have doubts about the business going forward with very little growth and a management that is focused on doing acquisition to keep growing vs. managing to get more cash back to shareholders.
While the valuation could leave some margin of safety I don’t think the will create enough returns organically to make me interested.
You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.
Have you looked at SNY recently? What was your takeway?
Many happy returns,
Ben
