NEXT STOP $24 OR $200? VALEANT ANALYSTS EVEN MORE DIVIDED.
Analysts left to read tea leaves on Valeant
As the dust settled from Tuesday’s devastating 50 per cent sell- off in Valeant Pharmaceuticals International Inc., analysts scrambled to reassess the prospects for the company’s shares going forward. And if they were divided before, they are even more so now.
On the l ow end, CIBC World Markets set a new price target of US$24 for the shares traded in New York, the lowest on the Street, down from US$90 previously.
At the other end of the spectrum, BMO Capital Markets left its outlook for the stock unchanged at US$ 133. ( That’s still well below Evercore ISI at US$200, which also reiterated its target price.)
The dramatic share price movement demonstrates how both investors and analysts were caught off guard by the magnitude of Valeant’s guidance reduction.
While certain parts of the earnings and guidance shortfall are understandable given the company’s ongoing changes and challenges, Valeant’s rescheduled conference call left the investment community with more questions than answers.
Despite several messy quarters still ahead for Valeant, most analysts at the high end of the spectrum stuck with their bullish stance — a somewhat puzzling development after more than US$ 10 billion in shareholder value was erased in just one day. Meanwhile, many of those who were already negative on the stock, cut their targets further.
These lowered expectations were also a result of the sharp decline in Valeant’s cash position, a sales dip for almost all of its top- selling products, and the failure to provide any more information about the timing of its pending 10- K filing.
“Management’ s credibility continues to be poor, and ( Tuesday’s) call did nothing to improve that,” CIBC World Markets analyst Prakash Gowd told clients, downgrading the stock to sector underperformer f rom sector performer. “We believe even longtime supporters may have lost confidence in management’s ability to see the business through this turmoil.”
He believes a management change is likely at Valeant, although finding a replacement chief executive probably won’t be easy.
But Michael Pearson may not be the only one on the way out the door. Since Valeant recently paid out its annual bonuses to employees, the company may see more resignations as individuals look for more stable working environments.
Pearson has done little to assuage spooked investors, and Tuesday’s conference call was a perfect example.
After Valeant revealed that it was cutting its 2016 EBITDA guidance for the next four quarters, a caller noticed that the number in the company’s slide presentation was lower than the figure on its press release.
Gimme Credit analyst Vicki Bryan noted t hat Pearson deflected the question “meanderingly” and said management a nd Valeant’s board continue to debate guidance. He was quickly interrupted by another executive, who said the numbers of the press release were incorrect and would be adjusted.
Bryan interpreted this mishap as a sign of how little confidence there may be in Valeant’s earnings outlook behind the scenes.
“With so many questions still unanswered, and so little convincing information available, we remain skeptical of Valeant’s guidance for 2016,” she said in a report.
It’s difficult to see what a revamped Valeant can do to restore its credibility business partners, regulators, shareholders or bondholders anytime i n the nearterm. Costs are also rising sharply, as Valeant is forced to defend i t self amid a range of government probes and lawsuits, and it faces a US$ 30 billion debt burden that comes with hefty interest payments.
Cutting his price t arget on Valeant to US$ 69 from US$ 85, RBC Capital Markets analyst Douglas Miehm t hinks i nvestors will remain focused on the possibility of default until amendments have been announced.
Valeant’s weak guidance was probably the last straw for many investors, and the threat of default on Valeant’s debt raises further questions about what is behind the delayed 10- K filing.
However, the company’s assets still have some convinced that it is worth substantially more than the current share price reflects.
Alex Arfaei at BMO acknowledged that Valeant’s earnings and guidance will do little to boost investor confidence, but he maintained a US$ 133 price target on the stock.
“The quarter was worse than we expected, the guidance was worse than we expected, and the timing of the 10- K is still uncertain,” he said in a report before Valeant’s conference call.
On a rare positive note, Arfaei pointed out that the neurology and other/gen- eric products segment — home to some of the products that saw controversial price hikes — came in approximately 23 per cent higher than anticipated.
Analysts seem to agree that Valeant chose to use cautious language in its press release, perhaps to lower the market’ s expectations. But it is unclear whether the company is being intentionally conservative to generate positive momentum for the stock in subsequent quarters, or if there is risk to the current numbers.
The recent past has shown that Valeant’s outlook can change meaningfully in a short period of time.