Should You Buy Valeant Pharmaceuticals Intl Inc. Stock Now, Ahead Of Earnings?

Valeant needs to maintain a fine balance between asset sales and future cash flow potential. To get investors interested, the company will need to sell fast growing high margin assets (in this case, CereVe, which has demonstrated >20% growth over the past two years) which could significantly affect its future cash flows and sales. Valeant is expected to lose upwards of $500 million in sales due to the planned asset sales. Many analysts have revised down their forecast for 2017, including RBC and JP Morgan. To quote JPMorgan analyst Chris Schott:

Following Valeant’s recently announced divestitures and ahead of 2017 guidance, we wanted to refresh estimates and update our outlook for Valeant. We are again lowering our estimates to reflect 1) the company’s recently announced asset sales, 2) a more conservative view of Valeant’s diversified products division and 3) FX headwinds. Our new 2017 EPS and EBITDA estimates are $4.30 and ~$3.7bn. While Valeant’s recent divestitures are a step in the right direction (helping to meet near-term debt reduction goals), we still see a challenging setup for the story with significant leverage and modest growth potential.

Census analysts' estimate for Valeant's 2017 revenue has fallen from more than $14.5 billion in October 2015 to the current estimate of $9.01 billion. During its Q3 earnings call, Valeant had said that 2017 EBITDA will be lower than 2016 EBITDA (mostly due to asset sales), though it did not quantify the decline. A steep decline in EBITDA would put the stock under heavy pressure. Investors will be keeping an eye on the EBITDA guidance. According to RBC’s Douglas Miehm and Joel Hurren an EBITDA below $3.75 billion will be a bad news. They expect 2017 EBITDA to be in the range of $3.8-$4.1 billion.

Should you buy Valeant stock going into the earnings?

Valeant stock presents a very aggressive risk-reward proposition going into the earnings. Wall Street currently has an average price target $22.39 indicating 35% upside from current price. The stock could go even higher on a strong guidance, approval of new drugs or additional non-core asset sales at good valuations. However, a miss on earnings or weak guidance could tank the stock. Risk-seeking investors could consider getting in the stock before the earnings.

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Disclosure: Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a ...

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