Valeant Pharmaceuticals Intl Inc (NYSE:VRX) will report third-quarter fiscal 2016 earning results on Tuesday before the opening bell. And by the recent reaction in Valeant stock, investors are bracing for the worst.
The embattled drug company has been more successful at boosting its drug prices than growing Valeant stock, which has fallen more than 18% in the past thirty days.
Notably, Valeant stock has fallen despite a string of positive news. Plus, Valeant ended its string to cutting its revenue forecast, which surprised investors. The fact Valeant kept its guidance steady impressed analysts at Morgan Stanley, which upgraded Valeant stock in August and boosted its price target to $42 from $33.
Since that August upgrade — which sent VRX stock climbing to a high of $32.74, marking a 40% rise on around $22 — Valeant stock has given up all those gains.
VRX stock currently trades at around $22.30, marking an almost 32% decline from the August high. This recent decline supports the narrative that Valeant remains a solid short play at any price above $25.
But how long will that story play out?
Valeant (VRX) Can Change Its Course
In August, while upgrading the stock, Morgan Stanley cited the company’s ability to become better capitalized. “We expect management to successfully renegotiate debt covenants for a small amount (est. $60 million extra annual interest expense), improve operating income & cash flow, and pay down debt,” Morgan Stanley said in the note. “As the company delivers, this can drive significant equity value accretion.”
Since that note, “equity value accretion” has gone the other way. While Morgan Stanley’s price target of $42 assumes 90% premium from current levels, it has been VRX stock short sellers that have made money since Morgan Stanley’s upgrade.
Valeant, however, can change the course when it reports earnings on Tuesday and delivers its outlook. Its earnings in the first two quarters missed analyst expectations, meaning it has to significantly outperform in the next two quarters to meet its full-year guidance.
On the positive side, fiscal 2016 consensus estimates have been lowered below Valeant’s midpoint guidance, which suggests Wall Street expects the company to slash its earnings guidance on Tuesday. This explains why VRX stock has been under pressure since August.
At the same time, Valeant would only need to report “less bad” results and maintain its guidance to send VRX stock soaring. With the shares down almost 20% in thirty days, the risk-versus-reward ratio is now on the positive side.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
