Can Valeant Bulls Stomach Double-Digit Revenue Declines?

Valeant (VRX) reports Q4 earnings February 28th. Analysts expect revenue of $2.17 billion and eps of $0.98. The revenue estimate implies a 2% decline Q/Q and a 12% Y/Y. Investors should focus on the following key items.

Can VRX Bulls Stomach Double-Digit Revenue Declines?

Valeant’s lead investor, Bill Ackman of Persing Square (PSHZF), bailed on the stock in March 2017. Shortly thereafter VRX hit a 52-week low of $8.31. The stock has been on a tear ever since, more than doubling. Management has announced new products like Siliq (psoriasis) and Vyzulta (glaucoma). The company has hived off non-core assets as promised. Valeant announced nearly $4 billion of divestitures over the past two years, which has allowed the company to pare $6 billion in debt.

I assumed buyers knew the company was desperate and would wait for it to go belly-up and pick off pieces of the carcass, or make low-ball offers for non-core assets. It hasn’t worked out that way. White hot financial markets and animal spirits since President Trump’s election have been boons to Valeant’s asset sales. After cutting its debt load by $6 billion bulls have trumpeted the company’s survival, and the shares have spiked largely based on sentiment.

Of note is that Valeant recorded $2.8 billion in tax recoveries so far in FY 2017. It has also stretched its payables to improve cash flow. However, the question remains, “Where is the growth?” VRX bulls would almost have you believe Valeant is a growth company. Q3 revenue fell 10% Y/Y. It was impacted by LOE for certain products and lost revenue from asset sales. I expect more of the same this quarter. If Valeant shows another double-digit revenue decline will bulls run for the hills?

Asset Sales Could Be Done For The Moment

Valeant’s Q3 EBITDA of $926 million was down 13% Y/Y and up 5% sequentially, despite the 1% sequential decline in revenue. Asset sales have allowed the company to reduce corporate overhead and cut R&D projects related to divested assets. EBITDA margin rebounded to 42% – the highest it has been since Valeant reported a 43% margin in the year-earlier period.