The performance of shares in German healthcare giant Bayer revives the idea that it is still possible to find deep value in large companies. Since we tipped the shares at close to a five-year low of €43 (£35), the price has risen 60 per cent to €70.4. While Bayer has been upgrading the prospects for its product pipeline for the next five years, there are good reasons why booking some profits makes sense.
Bayer's share price had been bid up as investors tried to forecast the outcome of a bidding war between Bayer and Reckitt Benckiser for vitamin company Schiff. Reckitt eventually won, prompting what looks like a short squeeze on Bayer's shares as funds that feared the company would win the war attempt to cover their positions. There is the comfort of Bayer not having to shell out lots of cash.
The re-rating has eliminated the discount to Bayer's peers, with the exception of Novo Nordisk. The shares now trade on a multiple of 11 times underlying earnings, so further price rises require a materially better trading performance. Given the outlook for the parts of Bayer most exposed to the business cycle, particularly its industrial materials business, that might be difficult to achieve. Finally, the dividend yield has fallen below 3 per cent, meaning there are far better income shares on the market.
