Bayer (1BAYN)
When it comes to turnaround stocks, especially those facing legal trouble, it sometimes takes a new political administration to lessen the burden and support the company’s comeback. A perfect example of this is Boeing over the past six years, which faced scrutiny after multiple crashes due to poor design and a criminal case by the DOJ. Shortly after Trump became present, the DOJ dismissed the case. Why? Because a company like Boeing is too big to hold down, especially when it fills political agendas.
Bayer is a similar story, but facing a different dilemma. Thousands of claims that their weed-killer causes cancer and they failed to warn consumers have heightened uncertainty, however the five year battle may be changing as the U.S. Supreme Court agrees to review the case.
This decision + earnings have sparked a massive rally in the stock. At a 70% gain in two months, lets talk about opportunities and headwinds:
Opportunities:
- Strong presence in life science research for both agricultural and pharmaceutical. Both of which are seeing support from the U.S. government. Not directly, but through ease of regulation, cutting red tape, etc. Their agriculture life sciences division can see a boost if the lawsuit is dismissed / settled.
- Strong pipeline of drugs with new drugs hitting the market, but face new law changes (we’ll cover that in headwinds).
- Largest seed and pesticide company in America. If U.S. farmers do well, Bayer does well. Note that this is cyclical.
Headwinds:
- Weak U.S. dollar. Although I’m talking about it like an American company, this is a German company that reports in Euros, so a weak dollar can shrink revenue. On the flip side to this, a weak dollar encourages other countries to buy crops from the U.S., which simultaneously helps Bayer sell more agricultural products and perhaps drugs manufactured in the U.S. This is a win and lose situation. The hope would be for sales growth to outweigh currency exchange discrepancies.
- The new administration’s reform of health care to Americans is not necessarily a headwind, but it is a pit of certainty. Bayer was previously charging the U.S. 3-5x the drug prices it charged Europe, but Trump’s most favored nation demand will slash profit margins. Note that some grandfathered drugs are being excluded from this, but new drugs Bayer plans to release aren’t…something to watch on the next earnings. Bayer is also helping offset the changes by raising costs on European countries.
Technicals in the short and long term:
The stock is seeing a class post-earnings rally, which kicked off in November, but as it approaches its next report and trades 70% higher, we may begin seeing a crack in the momentum. Near-term technicals show a new resistance formed at 46.00-47.00 this week, which is now the main level in focus for a breakout continuation to a 54.00-55.00 price target. The technicals suggest a pull back to around 38.00 if it fails to breakout to the next zone.
Long term - their CEO stated that the company’s agriculture business will get back to profitability by 2029. With new drugs hitting the market and an expected turnaround in their largest business segment, the stock has a bullish outlook through 2028-2030. However this depends on execution. Since this is a turnaround stock, investors will be a lot more cautious and reactive to any mishaps. Next earnings are scheduled on February 26th. For a long term position, the DCA approach may due considering the stock’s overbought levels.