Clear as day on Page 4 of its Q4 2016 conference call slides is the headline “New Valeant,” a confident statement by Valeant Pharmaceuticals Intl Inc (NYSE:VRX) that the past is in the past. Investors should simply forgot about all the company’s troubles of the past year and buy VRX stock.
Well, if you’re dumb enough to buy this obvious case of public relations 101, then maybe you’re dumb enough to buy Valeant shares as well.
For those who don’t follow blindly what other people say or do, here are three reasons you might want want to think twice before buying VRX stock.
Valeant Still Has Lots of Debt
In August 2016, Valeant said it would pay down $5 billion in debt over the next 18 months from the sale of various businesses it acquired over the past few years under former CEO Michael Pearson’s insatiable appetite for M&A.
In the fourth quarter, VRX paid down $519 million in debt. In addition, it agreed in January to sell three skincare brands to L’Oreal SA (ADR) (OTCMKTS:LRLCY) for $1.3 billion and Dendreon to Sanpower for $820 million, much of the $2.6 billion in proceeds going toward debt repayment.
That’s the good news.
The bad news is that excluding the $1.1 billion in senior secured term loans it repaid March 6, it still has $28.7 billion in long-term debt, with more than half due within the next five years.
In the past two years, VRX has paid $3.4 billion in interest on its debt and it expects to pay another $1.9 billion in 2017. To put this in perspective, that’s 45.2% of its current market cap. By comparison, Merck & Co., Inc. (NYSE:MRK) had interest expense of $693 million over the past 12 months or 1.5% of its market cap.
I get that the number looks even worse because its VRK stock has imploded but I think you get the picture. Valeant remains seriously overleveraged.
It’s a Sinking Ship
InvestorPlace contributor Dana Blankenhorn recently suggested investors shouldn’t waste any more time on VRX stock, citing debt as a huge reason to avoid it.
However, it was his pawnshop rationale that really makes sense.
He reckons investors are better off buying stock in the companies that take Valeant’s assets off its hands because these businesses understand how the game is played. Everyone and his dog knows that Valeant’s facing an uphill battle so everything it’s trying to unload gets substantially discounted reducing its ability to quickly repay debt.
It’s a Catch-22 that can only get worse for VRX investors as time passes and prospective investors take advantage of Valeant’s precarious position.
Altman Z-Score
At the same time that Valeant announced that it was repaying $1.1 billion of its debt, it announced that it was looking to refinance a chunk of its $28.7 billion in long-term debt.
Barron’s recently highlighted the fact that Valeant’s leverage ratio was getting higher by the day. Currently, around 6.9, it could run higher than 8.
“Valeant only managed to pay off $1.2 billion in debt in 2016, so leverage spiked to 6.9x versus the already high 5.8x in 2015, and it’s tracking mid-high 7x in 2017 depending on how much debt can be paid off with asset sale proceeds and free cash flow,” wrote Gimme Credit Senior High Yield Analyst Vicki Bryan at the end of February. “If this happens to Valeant, leverage could hit 8x or worse… If so leverage could remain uncomfortably high at least another year or two on a portfolio with greatly reduced profitability.”
Intrigued by Bryan’s assessment, I decided to figure out Valeant’s current Altman Z-Score. Anything below 1.8 isn’t good. How did VRX stock do?
Terribly.
Its Altman Z-Score came to 0.49. That’s half the score of Sears Holdings Corp (NASDAQ:SHLD) at 1.01 — Sears can’t even figure out how to release an earnings report! — and only slightly higher than when I discussed Valeant’s score back in February.
Bottom Line on VRX Stock
Mississippi blues musician R.L. Burnside brought out Come On In at age 71. Produced by Tom Rothrock, best known for producing Beck, the album took Burnside’s gritty Delta blues and combined a whole lot of dubbing to produce a very interesting record.
One of the song titles on the album was It’s Bad You Know.
You can definitely say that about Valeant stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
