How Should Investors Think About Valeant From Here

TL;DR

Investors should treat Valeant as a potential turnaround candidate, not a turnaround already underway. Michael Pearson’s departure, internal issues, acquisition-driven debt, and conflicting GAAP and non-GAAP results weaken the prior investment thesis, despite a forward adjusted P/E below 3. Valeant also needs to file its 10-K by April 29 while owing $30.9 billion and holding $1.4 billion on its books, making the details worth examining.

Transcript

when people talk about investing and they talk about companies you know you'll often hear people talking about you Asian you'll often hear them talking about growth prospects you'll often hear them talking about the mergers and acquisition strategy I mean these are all things that fundamental investors talk about and think about what that really co... Read More

Key Insights

• ❓ Leadership and company culture greatly impact the growth prospects, mergers and acquisitions, and overall stability of a company.
• 🤩 Internal issues, potentially caused by key figures like Michael Pearson, can shake investor confidence and challenge the investing thesis.
• 🚱 Understanding both gaap and non-gaap financial results is crucial when evaluating highly acquisitive companies.
• 🌚 Valiant's new CEO will face the challenge of managing a large debt burden created by past acquisitions.

Questions & Answers

Q: How should investors think about Valeant from here?

Investors should temper their enthusiasm and view Valeant as a potential turnaround candidate rather than an investment already progressing through a turnaround. Leadership changes, internal issues, heavy debt, and uncertainty around its financial reporting all need to be resolved before the situation becomes clearer.

Q: Why does Michael Pearson’s departure challenge the Valeant investment thesis?

Michael Pearson was central to many investment theses surrounding Valeant, particularly its acquisition-heavy strategy. His departure and possible contribution to internal issues call the company’s leadership and culture into question.

Q: What challenges will Valeant’s new CEO face?

The new CEO must determine what is needed to right the company while managing a mountainous debt burden created by past acquisitions. The replacement also needs to restore confidence after leadership departures and internal problems.

Q: How should investors compare Valeant’s GAAP and non-GAAP results?

Investors should examine both sets of results and reconcile the different stories they tell. Valeant was losing money on a GAAP basis but making money on a non-GAAP basis, so the adjusted figures should be understood rather than accepted without scrutiny.

Q: Why can adjusted earnings be misleading for highly acquisitive companies?

Adjusted earnings often exclude items such as one-time acquisition expenses. For highly acquisitive companies, numerous moving pieces make it difficult to see how acquisitions flow through to the bottom line, so investors should inspect what was excluded and why.

Q: Why might Valeant shares appear cheap on a non-GAAP basis?

Valeant expected adjusted earnings per share of between $9.50 and $10.50 in 2016 after revising its guidance downward. On that basis, its forward P/E ratio was less than 3, but the company’s risks meant that apparent bargain required caution.

Q: Why was Valeant’s April 29 10-K filing deadline important?

Valeant planned to file its 10-K by April 29, and doing so correctly was described as the first step forward. A failure to file could break loan covenants and allow debt holders to declare a default, potentially creating a cash crunch.

Q: How serious was Valeant’s debt and cash position?

Valeant owed $30.9 billion and had $1.4 billion on its books. That imbalance made timely financial filings especially important because a covenant breach and default declaration could intensify pressure on its available cash.

Summary & Key Takeaways

• Leadership and company culture play a crucial role in investing, affecting growth prospects, mergers and acquisitions, and overall stability.

• Michael Pearson, the key figure in Valiant's investing theses, may have contributed to internal issues, putting the investing thesis in doubt.

• Finding a new CEO and addressing the challenges, including a significant debt burden, is crucial for Valiant's future success.