Valeant Pharmaceuticals Intl Inc. Is a Buy if its Parts Sell

Until Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) sells some of its business and pays down debt, investors should still avoid it. But watch for the good news.

| More on:
The Motley Fool

Last summer, investors of Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) were riding high. The stock had reached an all-time high, and the company was trying to buy out larger and larger competitors. Business was booming and some people thought it would continue to skyrocket.

Then allegations of hiking the price of drugs plus claims of fraud brought the stock tumbling down. In July 2015, it was over $330 a share. Now it is a little over $40. Naturally, when companies see such significant drops, some investors start to wonder whether it’s valid or if the stock is a buy and investors are just overreacting.

Based on the current price, Valeant trades at only 3.1-3.5 times its forward earnings. That’s beyond cheap. But its debt-to-cap ratio is 80%. Specifically, it’s sitting on US$30 billion in debt. Further, the company expects its revenue to be 12% lower than it initially planned from US$12.5-12.7 billion down to US$11-11.2 billion.

Naturally, there are some hedge fund managers who trumpet the company and say that avoiding this stock is a mistake. Of course they say that … the price has plummeted, taking their earnings with it. Remember, Valeant used to be called a Hedge Fund Hotel. Every hedge fund had money in it because it couldn’t stop rising in price.

But when there is fear, opportunity can present itself. And Valeant does have an opportunity to move from “avoid” to “buy” in my spreadsheet of stocks. It needs to start selling pieces of its business, so it can get its debt under control.

The former CEO hoped to make it one of the largest pharmaceutical companies in the world; however, he wanted to do it as fast as possible. That strategy has failed and Valeant needs to divest its interests in some of its businesses.

Fortunately, it appears that the company is considering this. Yesterday, Reuters broke news that Valeant had brought in investment banks to help it review all of the options for selling pieces of its businesses.

Some of the products that have gained interest include Xifaxin, which is the prime product that was acquired in the Salix Pharmaceuticals deal. The others are Obagi and Solta, which are aesthetics products, and CeraVe, which is a skincare product.

Here’s the thing … companies use the media to try to gain goodwill. Until Valeant actually starts to sell some of its business and gets its debt under control, it’s all talk. It’s important for investors who don’t have access to tens of millions in capital to be very careful to avoid being deceived.

Therefore, my recommendation is to move Valeant from your “avoid” column to your “research” column and wait for there to be definitive news that Valeant is selling some of its business. If the company can start to get its debt under control, it’ll have a bright future. As the population ages, healthcare is going to become even more expensive, allowing companies like Valeant to generate profits.

The plan of action is simple. If it starts to sell pieces of its company and significantly hacks away at its debt, this stock could be a buy. Until then, I would watch it and wait. People can get rich buying stocks that are beaten down, but the trend for that company has to have changed. The trend hasn’t changed at Valeant yet, but it can.

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 Jacob Donnelly has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

More on Investing

think thought consider

TSX Stocks Are Still Dirt Cheap! 3 Bargains I’d Buy Today

TSX stocks like Well Health and BlackBerry are digitizing their chosen industries and effectively disrupting the landscape.

Read more »

investment research
Dividend Stocks

Better Buy: Scotiabank or TD Bank Stock?

Take a closer look at Scotiabank and TD Bank stock to determine which might be the better addition to your…

Read more »

retirees and finances
Dividend Stocks

How to Retire in a Bearish Market

Are you looking to retire this year but are skeptical because of the bearish market? Here is a way to…

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.

2 Seriously Misunderstood Value Stocks to Snap Up Before the Market Figures Them Out

Jamieson Wellness (TSX:JWEL) and another mid-cap stock are worth consideration for your TFSA.

Read more »

Target. Stand out from the crowd
Dividend Stocks

TFSA Investors: 2 Stocks to Buy if the Market Drops Even More

We still aren't in a recession, so we still haven't seen a market bottom. If these stocks drop even more,…

Read more »

analyze data

Why Brookfield Asset Management Could Be One of the TSX’s Best Value Stocks

Brookfield Asset Management (TSX:BAM) is a wonderful dividend-growth stock that's hiding in plain sight right now.

Read more »

Woman has an idea
Dividend Stocks

2 Dirt-Cheap Dividend Shares I’d Buy for Long-Term Passive Income

Dirt-cheap dividend stocks should be evaluated more thoroughly than their more stable counterparts for long-term dividend sustainability.

Read more »

stock research, analyze data
Dividend Stocks

3 Oversold Dividend Stocks (With a 7% Yield) I’d Buy Right Now

TSX dividend stocks such as Enbridge and TC Energy offer investors dividend yields of more than 7% in 2023.

Read more »