The Market Ticker
Commentary on The Capital Markets- Category [Company Specific]

You're going to think I'm out of my mind, given my view on the pharmaceutical business (and medical industry in general) -- but it's Valeant.

Certainly, you had an even better entry down under $29, but here's the case for it: Current year earnings estimates of about $8.50 and next year estimates over $10.

That puts the P/E on current-year estimates at about 4.

A month ago this sort of number was justified given the outrageous execution risk, highlighted by a possible debt default due to failure to file scheduled reports.

But that report is now in, and it came without the expected qualified opinion from their auditors.  In other words the auditors signed off on it rather than reserving judgment.

This is a very over-levered firm but it does have a 28% operating margin.  Further, the forward estimates include an expectation of major rollbacks of recent drug price hikes, so that's already in the forward expectations, and free cash flow is sufficient to cover debt obligations.

I expect the firm to sell non-core assets in an attempt to de-lever, which they really need to do.  But given the shake-up in the boardroom, including activist involvement directly (on the board), I believe it will get done.

The largest risk today would be a large spike in market interest rates over the next two years -- not a move higher, but a reactionary spike out of The Fed that would balloon their debt carrying costs before the company can get leverage down to a more-manageable long-term level.  The ratings agencies have already signaled that they're becoming more comfortable with the firm having a path out of the hole, and I tend to agree with them in that regard.

This is not a risk-free play by any means, but over the next 12-18 months I do think it could be a double, assuming the opinion of their auditors is valid.

The longer-term options don't look attractive, unfortunately, with implied vols above 70% -- you're going to pay, and big, to buy calls out far enough for this speculative shot to work, and the price of the stock itself is high enough that this is a true play, not an effective zero-cost option (as is often the case with stocks under $10.)

In general I don't like the market here.  I don't care for the technical picture at all and the fundamentals suck.

But.... if you told me I had to take a play in the market right here, right now, with the overall market trading at nose-bleed multiples and a very high probability of someone tossing the table over the next year resulting in a loss of at least 20 and perhaps 50% -- this is where I'd go with a small enough amount of money to not be too upset if I wind up losing half in the pursuit of a double.

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