Valeant Pharmaceuticals: Revisiting My $57 Price Target

Valeant Pharmaceuticals: Revisiting My $57 Price Target

To begin with, back in May when Bill Ackman sold his entire position in Valeant Pharmaceuticals (VRX), I said it might be a bullish sign.

From my experience, when a major capitulation happens from a major shareholder, or a shareholder that’s in the spotlight like Bill Ackman, then the stock rallied (assuming a company’s balance sheet is not broken).

And there is a reason for this. While everyone went on CNBC saying nice things about Bill Ackman (which I honestly think were sincere), deep down the market loves it when a major player takes such a hit.

But is this the reason VRX shares have rallied since then? Of course not. The rally also has very little to do with VRX’s corporate performance. The rally has mostly to do with the fact that VRX is not going out of business and is shedding assets to lower debt.

And the reason for this is simple: VRX has enough assets to sell that it can pay off all debt and still have money left over for shareholders. So as I said on a previous article, it cannot go out of business even if it tried (Please consider: Valeant Shares Are Worth At Least $57). Sure, one can debate my out-of-the-box reasoning, however, I think it’s as good as most valuation methods.

So I decided to revisit my methodology to see where we are today. As a reminder, I applied a 5X multiple to revenue and deducted total long-term debt, and then divided that by the outstanding share count.

To make it easier, I will use the net long-term debt as depicted below.


VRX Net Total Long-Term Debt (Quarterly) data by YCharts

So ballpark, VRX’s 12-month trailing revenue is about $9B. We will multiply that by 5X revenue, which comes out to $45B. Next, we deduct $26B in long-term net debt, and then divide by the outstanding number of shares, which is 348M. If we do the math, it comes out to about $54 per share.

So we are about $3 less than our last calculation, and I might be pushing it a little, because VRX might not do $9B in revenue next year.

However, please note I used a 5X revenue multiple, as opposed to 7-9X revenue the company received for asset sales last year. So there is a big discount in these calculations.

I have said in the past the faster VRX sells assets and reduces debt, the higher its stock will go. As proof that this reasoning is correct, VRX shares are higher since last year, despite the fact that revenue is lower.


VRX Revenue (TTM) data by YCharts

So if you ask me why VRX shares have rallied, my answer is because long-term debt has been reduced. So the takeaway from all this is, whenever you read about VRX selling something, chances are its stock will go up and this is probably irrespective of the results of the previous quarter.

So where does all this lead us? I will use the chart below from a previous article to try to guess where VRX shares should be, based on debt levels.

The chart above depicts VRX shares as a function of how much it lowers debt. If I am correct, as the company sells assets to lower debt, VRX shares should go higher.

So based on the above chart, VRX shares today should be somewhere around $16-$17 a share, based on the $26B in debt (blue line is debt, green bars are the stock price).

As you know, VRX had a great rally recently with shares climbing all the way up to $22. So based on the above chart, the stock is probably ahead of itself and might be due for a correction.

However please also note, when debt reaches about $24B shares should be at about $18, and with debt levels at $22B, shares should be about $21.

Obviously, if the company performs well, shares should (will) go much higher, but the above price targets assume no revenue or EPS growth.

Bottom line

I still think VRX shares are worth 2-3 times today’s price. The way I see it, all VRX has to do is lower debt by selling assets. As proof, even as revenue has declined since last year (as a result of asset sales), VRX shares have moved higher. And if more asset sales are announced, expect shares to move higher in the future.

I had a sizable position of VRX at around $12, but sold a little bit early at around $17. I do expect VRX shares to correct after the recent rally, and based on my calculations in the above chart, I would be a buyer again somewhere in the range between $15-$17.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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