Do Valeant Fundamentals Justify The Decrease In Bearish Sentiment?

As Valeant Pharmaceuticals Intl Inc VRX shares continue to surge, JPMorgan analyst Chris Schott is not buying into the hype as he maintained his Neutral rating with a $10 price target.

“Over the last two months, sentiment has become meaningfully less bearish following a series of constructive events including a 1Q guidance raise, debt refinancing transactions, and the potential for a debt-to-equity exchange. However, stepping back from these events and re-focusing on business fundamentals, we continue to see only limited signs of a turnaround in Valeant’s core franchises,” Schott said (see his track record here).

3 Key Takeaways

1. Valeant is still working to fix its core franchises. “The recovery of Valeant's core business remains the most important component of the company’s ongoing turnaround plan and we see only limited indications of an inflection in fundamentals in our view,” Schott said.
2. Schott remains cautious on earnings, “as nearly all of the near-term earnings upside we see at Valeant would be driven by short duration, non-core assets and we see limited value from upside surprises for these products beyond debt reduction as the core product categories remains our area of focus,” he noted.
3. A debt-to-equity exchange ratio will only be able to provide limited equity value but could improve sentiment.

Outlook

Schott believes Valeant currently has a relatively expensive valuation to its peers, and the pharmaceutical company has a long road to recovery ahead.

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