Worst Case Valeant (VRX) is a Buy - Mizuho
Mizuho Securities analyst Irina Koffler said worse case analysis and Valeant Pharmaceuticals (NYSE: VRX) is a Buy. The firm reiterated a Buy rating and $155 price target.
The stock is no longer trading on fundamentals in our view. We look at a liquidation valuation in the extreme case that management is ousted and the business is put up for sale under distressed conditions. We conclude shares are undervalued and reiterate our BUY rating
Key points:
- We try to remain rational and reiterate our BUY rating: We understand the panic associated with the turnover of large shareholders, potential government investigations, and the threat of management replacement. That said, our DCF analysis of the business under catastrophic scenarios (using estimates below our official numbers) generates a per-share value of $100. We lay out our analysis in more detail below.
- The company still has significant optionality, in our view. Valeant's emerging markets business generated EBIT margins below 15% in 1H:15 and is a divestable unit, in our view. We estimate 2016 sales of $2.1B which includes contribution from recently acquired Amoun. If Valeant divests this entire segment for a 2.5-3.5x sales multiple (in line with other deals in the sector), then we could see an influx of $5.3-7.4B into the company, which could be used to rapidly de-lever the business. If we still assume 2016 EBIT of $6.8B, and we reduce the company's debt position by approximately $6B, we think that Valeant's leverage could rapidly decline to the 3.5x level. and its overall profitability could improve. Management has always taken a very pragmatic approach to its business and historically indicated that all options were on the table.
- What happens if Pearson has to step down? Like others, we remain concerned about this risk but believe that our "fire sale" analysis already incorporates this scenario. Bear in mind that the portfolio contains a number of strong and growing Salix brands, well-known Jublia, and a robust ophthalmic/contact lens portfolio which should all command even higher sales multiples.
- Despite our catastrophic analysis, our current price target remains $155 and we are not changing our estimates ahead of updated management guidance.
For an analyst ratings summary and ratings history on Valeant Pharmaceuticals click here. For more ratings news on Valeant Pharmaceuticals click here.
Shares of Valeant Pharmaceuticals closed at $91.98 yesterday.