Morgan Stanley Makes Bullish Call on Valeant (VRX); Rating Raised to 'Overweight'
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(Updated - August 17, 2016 10:46 AM EDT)
Morgan Stanley upgraded Valeant Pharmaceuticals (NYSE: VRX) from Equalweight to Overweight with a price target of $42, implying 58% upside. The stock's bull case price target is $68 and its bear case is $11. Analyst David Risinger said his upgrade was primarily a multiple expansion call.
Risinger explained, "Although VRX still faces risks, we see the upside skew as attractive. Risk of severe financial stress should diminish as covenants are renegotiated and VRX pays down debt, and deleveraging should drive equity value accretion."
The analyst continued, "Following the company's 2Q earnings call, we see a clearer vision under new CEO Joe Papa to enhance financial prospects. We expect management to successfully renegotiate debt covenants for a small amount (est. $60M extra annual nterest expense), improve operating income & cash flow, and pay down debt. As the company delevers, this can drive significant equity value accretion."
Morgan Stanley new price target is is based upon a potential 10% increase in Valeant’s current trading enterprise value from $39 billion to nearly $44 billion, which would drive shares higher 58% from $27 to $42.
"Even if Valeant maintains the same Enterprise Value (EV), we anticipate that deleveraging can drive higher equity value accretion," the analyst said. "Simple math on stability: if we assume that Valeant's enterprise value were to remain constant, each $2B in organic (non-divestiture) free cash flow could effectively increase current equity value of $9.3B by >20%. We project 4-yr (2017-2020) FCF of $9B, net of estimated outflows of $2B for investigations/litigation, $1B for cap ex, and $1B for contingent consideration. Note our $9B FCF estimate is close to Valeant's current equity value."
Shares of Valeant Pharmaceuticals closed at $26.60 yesterday.
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