Bayer Beats 1Q17 Core EPS View, Raises FY17 Rev. Outlook

Bayer symbol on glass door - photo - June 2017Last week, German conglomerate Bayer AG (OTCMKTS:BAYZF) conveyed its firm interest to acquire the US-based chemical giant Monsanto for $122 per share, in an effort to consolidate its position in the chemical, pharmaceutical, and life science business across the world. The market conveyed its support for the acquisition by pushing the share price of Bayer to a new 12-month high of $133. Considering the highly complementary nature of both the businesses and impressive fiscal 2017 first-quarter results of Bayer, we have a bullish view of the stock.

In the quarter ended March 2017, Bayer recorded revenues of €13.244 billion, up 11.7% from €11.854 billion in the year-ago quarter. The Leverkusen, Germany-based company reported a 37.9% increase in Q1 2017 net income to €2.08 billion, or €2.39 per share, from €1.511 billion, or €1.83 per share, in Q1 2016.

Core net income from continuing operations were €2.286 billion, or €2.62 per share, in 1Q17, compared with €1.944 billion, or €2.35 per share, in 1Q16. The core earnings also surpassed Zacks Consensus estimate of €2.40 per share. Furthermore, adjusted EBITDA increased 14.9% y-o-y to €3.893 and above analysts’ estimates of €3.60 billion.

The pharmaceutical segment reported a 7.4 % y-o-y increase in quarterly sales to €4.263 billion. Drugs such as Xarelto, Adempas, Eylea, Stivarga, and Xofigo contributed to an increase in sales. Notably, Xarelto recorded sales of €751 million, up 20% on y-o-y basis.

The Consumer Health segment revenue increased 2.6% to €1.601 billion. The revenue growth was widespread across Europe, Middle East, Africa and Asia. Likewise, Crop Science segment sales grew 3.2% y-o-y to €3.12 billion. North American market primarily contributed to the revenue growth.

Covestro, a spinout company formed from Bayer in 2015, posted sales of €3.56 billion, up 23.6% on y-o-y basis. Higher volumes of polyurethane contributed to an increase in revenue.  Bayer now holds only 53% stake in Covestro, which was formerly referred to as Bayer Material Science.

In FY17, Bayer expects sales of about €51 billion. This compares with prior revenue outlook of €49 billion. The company also raised its core earnings per share from continuing operations guidance. Bayer now expects FY17 Core EPS to grow at a mid- to high-single-digit percentage, from the prior growth outlook of mid-single-digit percentage. Thus, considering the strong earnings growth and possible acquisition of Monsanto, we anticipate the stock to remain bullish in the short-term.

The price chart indicates support for the stock at 135. The rising Chaikin money flow indicator point to an underlying bullishness in the stock. Furthermore, the stock is also trading above the 50-day moving average of 133. Thus, we can expect the stock to forge new heights in the near future.

Bayer - Technical Analysis - 5th June 2017

We wish to gain from the rally in the share price by purchasing a call option expiring on or around June 13th. Furthermore, an investment would be made only when the stock trades near $136 in the equity market.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.