Viatris: cheap stocks, solid dividend yield, impressive free cash flow (NASDAQ: VTRS)
A lot of men are crazy, and no one knows it. They don’t know it themselves“- Agatha Christie, the secret adversary
Today we take an in-depth look at a large-cap drugmaker called Viatris (VTRS). The stock is selling below its trading levels when it debuted in the market in mid-2020. However, it is one of the few biopharma stocks to see a stock rally so far here in early 2022.
Viatris is based just outside of Pittsburgh. The company manufactures, markets and distributes branded and generic drugs as well as complex generics, biosimilars and active pharmaceutical ingredients (APIs) in the United States and around the world. The formation of Viatris was born from the combination of former Mylan and the Upjohn unit of Pfizer (PFE) in what was essentially a Pfizer spin-off that the FDA approved and put on the market with its new ticker symbol in late 2020. Currently, the stock is trading just above $15.00 per share and has a capitalization stock market just north of $18 billion.
Third Quarter Highlights:
The company has a complex product portfolio with dozens of products. Its product line includes generic drugs, complex compounds and biosimilars as well as branded drugs such as Lipitor, Viagra and EpiPen. This mix appears to be working for Viatris, as the company reported strong third quarter results in the second week of November.
It’s hard to find much fault with the quarterly numbers that Viatris delivered across the board. The company posted GAAP net income of $312 million in the quarter. Revenue rose more than 50% from the same period a year ago to $4.52 billion as it consolidated its business segments. Management also took the opportunity to raise the forecast for the 2021 financial year on many parameters. It did the same with the second quarter results, it should be noted.
What stands out for me is the free cash flow generated by the business. At the midpoint of recent guidance, the company is expected to produce $2.5 billion in free cash flow for the year, giving the stock a free cash flow yield in the low teens.
Viatris used this free cash flow mainly in 2021 to pay down debt on its balance sheet. The company also pays quarterly dividends to its shareholders. In early January, Viatris announced that it would increase its quarterly payment by 9%. At current trading levels, the stock is yielding 3.2% on the annual payout after its recent dividend hike.
Analysts’ comments and review:
The analyst community has mixed opinions about Viatris. Over the past year, six analyst firms, including Goldman Sachs and Piper Sandler, have either launched or downgraded the name to Hold. The price targets offered by the pessimists range from $15 to $18 per share. Half a dozen analyst firms, including Barclays and Credit Suisse, have also reissued buy ratings on VTRS. The price targets offered by optimists range from $19 to $24 per share. It should be noted that analysts have become more bullish on the stock in recent months as the last five analyst firms to step in have issued buy ratings.
The company produced an impressive free cash flow of more than $2.2 billion in the first nine months of its 2021 fiscal year. At the end of September, the company had nearly $900 million in cash. and marketable securities on its balance sheet versus just under $1.9 billion in long-term debt. The company used free cash flow to pay down $1.9 billion of debt in fiscal 2021, as also mentioned in a previous section.
It looks like Viatris had a good year in 2021. However, the current consensus calls for the company to post stable earnings and revenue growth in fiscal year 2022. Expectations are around $3.75 per share of earnings for fiscal years 2021 and 2022. That values VTRS at just four times earnings at current trading levels, in addition to a dividend yield north of 3%. Even taking net debt into account, if one evaluates a 10% free cash yield based on cash flow generation in fiscal year 2021, VTRS should trade in the $20 range.
Management has declared this currently in Phase I of its plan for the resurgent company. In this phase, leadership focuses on deleveraging, debt repayment, dividend growth and achieving integration and synergies. This phase is expected to be the main focus of the company from 2021 to 2023.
Phase II will be more about delivering from their pipeline and moving up the value chain to more sustainable, longer lifecycle products that will hopefully add a growth engine to what is now a value game . In December, there was speculation that Viatris was in preliminary talks with India’s Biocon to combine its Mylan unit and merge their biosimilar businesses. According to these sources, the combined company may seek an IPO of around $10 billion in the future. Not much new has emerged on this front in 2022, but it’s something to watch. In early 2021, there were rumors that Viatris was looking to do the same with Merck (MRK) business in this space, but nothing came of it.
I took a first position in VTRS via a covered call strategy using July $15 call strikes. This provides me with a solid option premium and two dividend payouts over the life of the option and should provide total return in the low teens, even if the stock does nothing. This strategy is consistent with producing consistent singles in an overvalued market, and it’s hard to see much downside in VTRS at current trading levels.
Passion often drives the most intelligent man mad, and makes the greatest madmen intelligent..” – François de La Rochefoucauld
Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum