Why Valeant Pharmaceuticals Intl Inc.’s Stock Is Soaring Over 10%

Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) released its earnings today. They showed that the company earned $1.05 per share in the last quarter — well above of the forecasted $0.94 that analysts expected.

The stock is performing well as a result of the positive earnings. I’ll dig into the results to help you decide whether you should be buying into the rally or selling off your gains.

Revenues are down but operating income is up

Revenues for the second quarter totaled $2.23 billion, which were down from $2.42 billion a year go for a decrease of 7.7%. However, the company’s operating income more than doubled from a year ago, going from $81 million to $175 million for the current quarter.

The biggest reason for the improvement was a reduction in asset impairments of $145 million. The company also was able to cut costs related to research and development, amortization, and selling, general, and administrative expenses.

Increased net income

The improved operating income allowed the company to post a better bottom line. Valeant saw a loss for the quarter of $38 million, showing a significant improvement from the $302 million loss it had a year ago.

Tax recoveries helped the company achieve about half of the total improvement in the bottom line, with $132 million more in tax recoveries this year than in 2016. Before taxes, the company’s loss was $242 million compared to $377 million in the prior year, and the improvement there shrinks to just $135 million.

Improvement primarily from non-operating activities

Aside from taxes, the company’s better results can be tied to an improved operating income, which was largely helped by lower impairment expenses. For those reasons, I am not overly impressed with the company’s improvement in net income. Valeant saw overall declines for the period and benefited from non-operating expense reductions and tax recoveries.

The company remains committed to paying down its debt, and it expects to reach its targeted reduction of $5 billion earlier than expected. However, with over $28 billion in long-term debt, the company is still heavily leveraged, and I would argue that a $5 billion reduction is not nearly enough when its equity is less than $4 billion. The company’s debt-to-equity ratio is still going to be very high and does little to put the company out of risk.

Stock performance and reaction

Investors have responded positively to the results; the stock has increased over 10% today. At its current level of over $21 per share, I don’t believe the stock has a lot more upside left in its price.

The company has not seen share price reach $23 since November, and I don’t see a reason to think the company has improved enough to get back to even those levels. Even at the current level, I think it the price is generous given that the improved bottom line is not related to improved operations.

Bottom line

I would not be overly optimistic about Valeant’s future and would avoid the stock. The shares may be riding high today because it has beaten expectations, but the company’s fundamentals have not changed, and it still has the same problems it did before the earnings came out.

I would expect a correction in the coming days and for the stock to give back some of the gains it made today.

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Fool contributor David Jagielski has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

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