Most of us have heard of Valeant Pharmaceuticals Intl Inc (NYSE:VRX). VRX stock infamously went from approximately $260 per share during the summer of 2015 to around $9 a share earlier this year. Loudmouth hedge fund manager Bill Ackman stayed behind the company despite being taken behind the woodshed on his position. He eventually threw in the towel, but not before losing several billion dollars.
VRX stock has since rebounded, selling for $17 and change in July before falling back to today’s levels near $14.
There’s a few different ways to dissect VRX stock.
To buy it doesn’t mean you have to own it for years and years — heck, you don’t even need to own it for months. The move from $8 to $18 was a big one, a rally of more than 100% even if buyers didn’t hit the top and the bottom.
The many unknowns with VRX makes finding the ideal entry and exit points even harder. I, myself, prefer fundamentally sound companies over fundamentally weak companies — at least when it comes to buying. But with VRX stock down more than 90% from its highs, it’s far too late to consider shorting.
Valeant’s Woes
At last count, VRX’s total debt stood at $28.6 billion. While this is down 7.8% year-over-year from $31.06 billion, it’s still incredibly high. It’s also up slightly quarter-over-over from $28.55 billion.
Consider that VRX stock now sports a market cap of about $4.9 billion, roughly one-sixth the size of its debt. That’s a big concern and it would be a huge mistake for investors to overlook. We recently compared this to Tesla Inc (NASDAQ:TSLA) — a company many investors also critique for its debt load.
For comparison, TSLA currently has $7.9 billion in debt — almost four times smaller than VRX’s debt load — but it sports a market cap of $63 billion. This is what Valeant used to have — a large market cap and noteworthy debt. If it had to, worst case, it could raise capital via stock sales and pay down debt.
Tesla could do that several times going forward if necessary. Sure, its stock price would suffer, but it could be done. With a market cap of just $4.9 billion, VRX no longer has that option.
Let’s put it this way: If TSLA stock were to collapse 95%, it would plummet from around $377 to just $18. It’s market cap would drop to a measly $3.15 billion… and it would still have a better debt ratio than VRX. In fact, it would be in twice as good of a position, from a debt-to-market-cap perspective.
So What Can Valeant Do?
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In 2016, Valeant brought in Joe Papa to help lead the company’s transformation and, hopefully, keep it from going bankrupt. It’s clear Valeant had to — and still needs to — pare down its brands. VRX is in a tough position, because shedding top assets will hurt its business, but its worst-performing lines will generate the least amount of cash in return.
Between the latest conference call and a recent interview, Papa explained Valeant’s plan. It will use its positive free cash flow to pay down debt. It will also divest about 12 assets in order to help reduce its debt burden. Because of the superior performance of other lines, these divestitures shouldn’t hurt the bottom line, management contends.
Indeed, Valeant does generate decent cash flow, with $1.22 billion in operating cash flow over the past two quarters. Although only $216 million has been used for capital expenditures, R&D has become a greater focal point to the business. We’ll see how much cash Valeant is able to raise from asset sales and how much free-cash flow will go toward lowering its $28.6 billion burden.
As of now, Papa’s goal is to reduce debt by $5 billion by February 2018. This would be a huge improvement from today’s situation, but $23.6 billion is still a lot of debt.
The Bottom Line on VRX Stock
Maybe a trader can find the 50% moves in VRX stock. I’m not one of them.
Investors can make a case for betting on this stock and betting against it. I would rather leave it as a no-touch. After a big decline, I’m hesitant to short it, even if its debt load is monstrous. But because of that debt load, I don’t want to own it.
It’s okay to take a pass on a stock. Let’s wait for some management updates before betting on VRX stock. In the meantime, investors can look for dividend stocks to buy on a September swoon, names like Johnson & Johnson (NYSE:JNJ), PepsiCo, Inc. (NYSE:PEP) and these five others.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
