To The Moon

September is historically a volatile month for global markets. It’s been one of the worst months for stocks in the past four years, Wall Street’s fear gauge has risen each September the past three years.

Traders are pricing the Fed’s easing cycle will begin this month, with a roughly one-in-four chance of a 50 basis point cut. The best-performing concepts is Monkeypox Concept.

Considering the different perceptions of the stock, this time TigerPicks chose $Viatris Inc.(VTRS)$ to have a fundamental highlight to help users understand it better.

$Viatris Inc.(VTRS)$

Viatris is a global pharmaceutical company that operates in 165 countries, and produces drugs that reach over 1 billion patients annually.

It carries a well-rounded portfolio of branded drugs including 20 iconic brands from $Pfizer(PFE)$ and Mylan, generics, and biosimilars, and has been divesting non-core assets to focus on its core strengths and growth areas. Over the trailing 12 months, VTRS generated $15.2 billion in total revenue.

Why Bargain-Priced Viatris Could Deliver Strong Returns

VTRS recently reported a strong Q2 2024, marking its 5th consecutive quarter of operational revenue growth at 2% YoY and total revenue of $3.8 billion, reflecting the company's resilience amidst economic volatility over the past 2 years. Adjusted EBITDA also grew by $2% YoY to $1.2 billion. Also encouraging, adjusted EPS grew by 3% YoY to $0.69, and VTRS achieved free cash flow of $426 million in the quarter.

Operational revenue (excludes divestitures) grew for both the Branded and Generics segment. This was driven by strong growth in Greater China and expansion of the portfolio to Emerging Markets and JANZ (Japan, Australia, and New Zealand). Meanwhile, Generics saw strong growth in developed markets and growth in complex products.

vtrs dividend stock

Management is guiding for 2% operational revenue growth this year, and stable adjusted EBITDA and adjusted EPS. This includes raised guidance for new product revenue of $550 million at the midpoint of the range, as a result of strong uptake of generic launches and additional new products.

Importantly, VTRS continues to pay down the debt its carried since spinning off from Pfizer and merging with Mylan. This includes debt paydown of $800 million during Q2 alone, and it expects to have in excess of $3 billion available for deployment in the second half of this year.

VTRS has repaid $7.4 billion in debt since 2021, which represents most of the $8.4 billion in free cash flow generated over the same timeframe. As shown below, this puts VTRS well on its path to achieve a much safer debt to EBITDA ratio of 3.0x by the end of this year, supporting its BBB and BBB- credit ratings from Fitch and S&P.

vtrs dividend stock

At the same time, VTRS is balancing capital returns and reinvestment into the business. This includes $350 million worth of business development, $288 million towards dividends and $250 million toward share buybacks, as shown below.

vtrs stock

Importantly for income investors, VTRS currently yields 4.2% and the dividend is very well-covered by a 17% payout ratio. While VTRS hasn't grown its dividend since formation, that has more to do with its prioritization of paying down debt. I would expect for shareholder returns in the form of dividend growth and share buybacks to accelerate after it gets leverage down to a safer 2 to 2.5x range.

In the meantime, investors get paid to wait while the stock currently trades at $11.40 with a very low forward PE of 4.3x. At the current valuation, VTRS is priced as a perpetually declining business, but that doesn't appear to be the case considering the aforementioned guidance and analyst expectations for 2% to 4% annual EPS growth over the next 2 years.

With a 4.2% dividend yield, a conservative expectation for 2% annual EPS, potential for future share buybacks along with a potential rerating to a higher valuation, I believe VTRS could deliver market beating returns from the current bargain price.

Risks to the thesis include potential for increased competition from the generics space, which could compress pricing and margins. In addition, higher-for-longer interest rates could result in higher cost of debt for VTRS, considering its balance sheet is still a work in progress toward deleveraging. In addition, macroeconomic pressures could result in weaker consumer demand for its new and existing drugs.

Investor Takeaway

Viatris remains a bargain-basement opportunity for income and value investors, especially in a market environment where many stocks are trading at elevated valuations. VTRS has shown consistent operational revenue growth, strengthened its balance sheet by significantly reducing debt, and offers a well-covered 4.2% dividend yield.

The company’s ongoing efforts to streamline its portfolio through divestiture of non-core assets and invest in growth areas, along with potential for future dividend increases and share buybacks, position it well for market-beating returns. As such, I continue to rate VTRS as a 'Buy' for income and potentially strong total returns.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 2 Wall Street analysts offering 12 month price targets for Viatris in the last 3 months. The average price target is $11.00 with a high forecast of $11.00 and a low forecast of $11.00. The average price target represents a 0.00% change from the last price of $11.00.

Resource:

https://seekingalpha.com/article/4714836-why-bargain-priced-viatris-could-deliver-strong-returns

What are your thoughts on $Viatris Inc.(VTRS)$ ?