This Stock Just Keeps on Rolling

But with such a reliance on acquisitions, how long can the good times last?

| More on:
The Motley Fool

The headline numbers were impressive. Valeant Pharmaceuticals (TSX:VRX)(NYSE:VRX) reported results for the fourth quarter of 2013, with both product sales and revenue numbers doubling year over year.

Cash earnings per share increased by over three quarters, while adjusted cash flow from operations was up 43%. For all of fiscal 2013, Valeant surpassed expectations on all of the measures above. The results were yet another positive surprise in a long string of successes for Valeant, whose stock has increased 10-fold over the past four years.

Last year the defining event was the U.S. $8.7 billion acquisition of eye-care company Bausch and Lomb in August, which so far has worked out very well. The division’s sales grew by 10% organically, performing very strongly in both the United States and emerging markets.

Valeant has relied heavily on acquisitions to fuel its growth ever since new CEO Michael Pearson took over, and to the company’s credit, the strategy has worked extremely well. Last year was no exception. The company has said it is looking for another transformative acquisition in 2014, and given Mr. Pearson’s track record at Valeant, this is good news for shareholders.

On the other hand, Valeant’s reliance on acquisitions does create concerns. Firstly, it is extremely difficult to predict where the company will be long term, or even in the medium term. Analysts have complained that this is one of the most difficult companies to model. For investors that don’t like surprises, this may be a stock to avoid.

Second, Valeant’s strategy can lead to accounting distortions. For example, the company spent less than 3% of revenues on research and development in 2013, simply because Valeant buys new products instead of developing them internally. Meanwhile Pfizer (NYSE:PFE) spent 13% of revenues on R&D and Merck & Co (NYSE:MRK) spent 17%. So even though Valeant still had to pay for its targets’ past R&D efforts (by paying up for its acquisitions), the company doesn’t have to record that cash outlay as an expense, unlike its large American rivals.

Foolish bottom line

An investment in Valeant requires placing a big trust in management, more so than for almost any other company on the TSX. Investors who emphasize predictability of earnings should look elsewhere.

But those who have put their faith in Valeant’s management have been handsomely rewarded so far. If management keeps delivering, then the good times will continue for shareholders.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing


CNR Stock: Should You Buy Today?

Canadian National Railway has been hit in recent quarters, as economic growth has slowed, with CNR stock declining 10% in…

Read more »

Family relationship with bond and care
Dividend Stocks

TFSA Investors: 3 Cheap Canadian Stocks for Retirees

These three Canadian stocks are super cheap for retirees looking for a great buy that will last the test of…

Read more »

calculate and analyze stock
Dividend Stocks

CPP Disability Benefits: Here’s How Much You Could Get

Not everybody can get CPP disability benefits. If you want some passive income, consider investing in Royal Bank of Canada…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Boosting Your Monthly Income: TSX Stocks That Deliver

Dividend investing can boost regular or active incomes, especially select TSX stocks that pay monthly dividends.

Read more »

consider the options
Tech Stocks

Better Buy (2024 Edition): Shopify or Nvidia Stock?

Shopify (TSX:SHOP) isn't the only red-hot tech stock in town that could add to recent gains.

Read more »

Bad apple with good apples

5 Stocks You Can Confidently Invest $500 in Right Now

These stocks could significantly grow your investment over the next decade.

Read more »

Illustration of bull and bear
Tech Stocks

A Bull Market Is Coming: 3 Growth Stocks That Could Thrive

Given their high growth prospects and cheaper valuation, these three growth stocks would be an excellent buy as the market…

Read more »

Golden crown on a red velvet background
Energy Stocks

Enbridge Stock: This Dividend Aristocrat Could Gain in 2024

Enbridge (TSX:ENB) stock is looking like a great buy as management expects it to grow in 2024.

Read more »