Sanofi –Aventis is the 4th largest drug company in the world and a big holding of Berkshire Hathaway. They’ve earned an ‘A+’ financial strength rating and an 85th percentile ‘stock price stability’ grade from Value Line.
2008 sales, earnings, cash flow and dividend payout are all expected to hit all-time highs. Despite that, the ADRs hit a new four-year low yesterday and now trade at $32.62 /ADR.
That’s well off their 2006, 2007 & 2008 highs of $50.10, $48.30 and $49.00 respectively.
This year’s annual dividend was $1.604 per ADR [before foreign tax withholding] for a pre-tax current yield of 4.50% – the highest ever for SNY.
Here’s a very conservative way to play with a Warren Buffett favorite while it appears to be very undervalued.
…………………………………………………Cash Outlay …………..Cash Inflow
Buy 1000 SNY @ $32.62 ……………….…….. $32,620
Sell 10 SNY Dec. $32.50 Puts @ $2.55 ………………………………… $2,550
Sell 10 SNY Dec. $32.50 Calls @ $3.00 ………………………………… $3,000
Net Cash Outlay ………………………………. $27,070
If Sanofi-Aventis ADRs stay above $32.50 until expiration date on Dec. 19, 2008:
[The ADRs are slightly above that price right now.]
Your stock will be called [sold] for $32,500.
Your $32.50 puts will expire worthless [a good thing for you as a seller].
You will have $32,500 cash – no ADRs and no option obligations.
That’s a $5,430 net profit on a cash outlay of $27,070 or + 20% in just over 6 months.
Not too bad on a stock that did not need to move up at all to achieve this result.
Risk?
Break-even on the shares is $32.62 less the $3.00 call premium = $29.62.
Break-even on the puts is the $32.50 strike price less the $2.55 put premium = $29.95.
In a worst case you will be forced to own 2000 ADRs of SNY at an average net cost of $29.79. That’s lower than the lows for these ADRs since early 2004 and way cheaper than Mr. Buffett’s cost basis.
GuruFocus.com noted that Berkshire Hathaway increased its SNY position by 69.6% during the March quarter (at an average price of $44) and held 828,500 total ADRs at that time.
