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Msg  1228 of 1244  at  11/17/2023 7:33:52 PM  by


Why the Cheapest Stock in the S&P 500 Is No Bargain

Why the Cheapest Stock in the S&P 500 Is No Bargain


Behold the cheapest stock in the S&P 500, which is to say, the most reviled.

It's not credit-card issuer Synchrony Financial (ticker: SYF), whose industry Wall Street is watching with angst as delinquency rates rise, or Texas utility NRG Energy (NRG), under pressure from an activist investor for its $2.8 billion purchase of Vivint, a maker of home security and control gadgets. At just over five times forward earnings estimates apiece, they're in the bottom five, but they look like Nvidia and Tesla relative to the company at issue here.

It's also not those perennial punching bags United Airlines Holdings (UAL), at 4.7 times earnings, and General Motors (GM), at 4.4 times. Warren Buffett, who says his favorite holding time for stocks is forever, has had enough of GM after 11 years—his Berkshire Hathaway (BRK.B) just dumped its stake, according to a filing this past week. But let's plumb even deeper.

Viatris (VTRS) trades at just 3.3 times earnings, with a dividend yield of 5.1%. This year, the company is likely to generate more than 20% of its stock market value in free cash. Yet only three of 11 analysts who cover the stock recommend buying it. Think carefully before doing so. Jefferies upgraded the stock in January, predicting a 29% rise. But so far it has gotten a 20% slide.

You might be asking: Via-what now? How did a company that many investors have never heard of sneak into the S&P 500, and why does its name vaguely evoke a date-night medicament for men?

There used to be a drug company called Mylan. Its biggest innovation might have been buying a nearly half-century-old adrenaline injector called EpiPen—which can save the life of a person during a severe allergic reaction—and then jacking up the price per two-pack from about $100 to $600 between 2007 and 2016. An email disclosed in an antitrust lawsuit showed that Mylan CEO Heather Bresch had corresponded with the CEO of manufacturing partner Pfizer (PFE) about killing its rival Adrenaclick, which had quickly grabbed a 10% market share.

Mylan needed a makeover; its stock had gone into freefall after Bresch was called before Congress for a bipartisan bawl-out in 2016.

In 2020, during the pandemic, it combined with Upjohn, a unit of Pfizer that's a who's who of what used to enjoy patent exclusivity for treating what. There's Lyrica for nerve pain, Celebrex for arthritis, and of course Viagra for, you know. And many others. The deal was structured as a Reverse Morris Trust, which is where a parent company looking to cash in unwanted assets and avoid taxes spins off an Unwanted Co. to its shareholders, while a slightly smaller company that promises synergies merges with Unwanted to create Really Good Stuff Co., leaving shareholders of the original parent as majority owners.

In this case, the deal closed in November 2020, and Mylan became Viatris, and the stock kept falling. Then new management introduced a big dividend, and the stock kept falling. Then last year it detailed a new business plan and, well, you see where this is going. The plan called for selling the company's biosimilars business for more than $3 billion, plus other assets, resulting in combined pretax proceeds estimated at up to $9 billion, by the end of this year. Mind you, Viatris recently had a stock market value of just over $11 billion.

When Jefferies upgraded the stock early this year, it said it liked that management had recently provided a "clear road map" to growth. It had bought two companies with treatments for dry eyes as part of a strategy to become a "global ophthalmology leader." More broadly, it plans to offset its base business erosion with its "organic pipeline," which means making things, and its "inorganic opportunities," which means buying things.

Divesting biosimilars, or cheaper versions of off-patent biologic drugs, makes sense. That market will be a cash grab in coming years, but there is fierce competition from heavyweights like Teva Pharmaceutical Industries (TEVA). AbbVie's (ABBV) arthritis blockbuster Humira, which this year reached the end of a yearslong patent-extension dance, faces competition from at least seven biosimilar programs.

What might have disappointed investors most, UBS wrote in September, is coming to the gradual conclusion that the spinoff proceeds and timeline could disappoint. But transactions are now afoot. Neutral-rated J.P. Morgan, after recent meetings with management, came away estimating that after sales, remaining 2024 earnings before interest, taxes, depreciation, and amortization, or Ebitda, could be $4.8 billion, with modest growth over time.

There's a meme shared by investors on social media featuring side-by-side photos labeled "adjusted Ebitda" and "free cash flow." The Ebitda photo is of golden-haired Hollywood beauty Jennifer Aniston. Free cash flow is septuagenarian rocker Iggy Pop, who has golden hair but, in this particular shot at least, a reverse-Aniston face. Investors should probably stick with the harsher measure.

Viatris is targeting $2.3 billion in free cash flow next year, and $2.5 billion from recently announced sales.

There are worse starting points for turnarounds. You'd think that management could put part of that money toward a new pill or two, to reinvigorate its slumping stock. Its stated ambition is to "move up the value chain" in drug development—for example, by focusing on complex injectibles. But for now, the bull case is basically: How much further can this thing fall? We'll see.

EpiPen epilogue: Bresch got a $30 million golden parachute after the Upjohn deal. Viatris and Pfizer agreed to EpiPen settlements totaling hundreds of millions of dollars each, without admitting wrongdoing. And you can now buy generic adrenaline pens. CVS recently sold an EpiPen two-pack for $650, and a generic one for $340.

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