A company that was previously an options-like play on balance sheet improvement, Bausch Health Companies (TSX: BHC)(NYSE: BHC) remains an interesting turnaround pick today.
Bausch is the former Valeant Pharmaceuticals, once a high-flying TSX superstar. Since its fall from glory via a series of scandals and poorly-timed and overpriced acquisitions, the company has been in “right-sizing mode” for the past five years. Accordingly, a series of steps in the right direction have allowed for strong share price appreciation coming out of this pandemic. I think there remains potential for a rapid turnaround with Bausch, one that could take this stock much higher in 2021.
Core pharmaceutical businesses likely to remain robust
The company’s share price has doubled from March lows. This is indeed a rebound play, of sorts. Bausch holds a portfolio of high-quality pharmaceutical assets in the eye care, gastroenterology, and dermatology space. These offerings have generated decent operating margins and cash flows, but the company still doesn’t turn a profit. A big reason for this is the massive debt load taken on during the Valeant “empire-building” days.
Speculation around the company’s core pharmaceutical businesses slowing down has not materialized to the degree many expected. If Bausch can generate growth from its core businesses, visibility to a pathway to profitability could materialize.
Debt likely to remain a headwind
If we do see a rotation toward value stocks in 2021, Bausch could be an outperformer. This is a stock that trades at roughly 10-times operating cash flow. That said, the company’s debt load of nearly $25 billion is around two-and-a-half times its market capitalization, and 25 times its cash flow.
As mentioned, outsized growth is the only way Bausch has a path to future profitability. This is made difficult due to the fact that the company is likely to continue selling assets to pay down debt. Additionally, we’re likely going to see more streamlining and cost-cutting in the near-term in the same vein. I think this headwind significantly detracts from the turnaround story, and makes this stock a difficult one to own long term.
Bottom line
Indeed, there remains a significant amount of optimism that Bausch could get back to growth. Whether that’s in 2021 or beyond depends on a lot of factors. I think right now, this stock is fairly priced. I think investors are taking a risk with betting on a quicker-than-expected turnaround with Bausch, given the fact that debt concerns typically take a while to be sorted out. Bausch is still probably a few years away from getting its debt to a level that’s manageable. That’s a long time for the average investor to be patient.
Unfortunately, Bausch as it stands today is just a shell of its former Valeant days. The company was forced to sell off many of its highest quality assets to pay down a substantial debt load. Today, that debt load remains sizable.
This is a company I’d suggest investors add to their watch list and consider on dips like the one we saw in March. Right now, I don’t know that the risk-reward justifies investment at these levels.
