After its impressive post-earnings rally on May 8, sending the stock to a $27.79 peak, the subsequent drop by shares of Valeant Pharmaceutical (TSX: VRX) is equally unexpected. High debt levels, which stand at 5.89 times equity, may limit the near-term upside in the stock. Investors could anticipate the stock falling back to the $20 range ahead of the earnings report in August.
In its first quarter, the management team removed multiple unknowns. It resolved 20 litigations and investigations. The company wrote down $2.2 billion in goodwill costs, most of which contributed to the $2.7-billion non-GAAP loss in the quarter.
Growth catalysts
Sales grew 20% in China and 17% in Mexico, while rising only 2% in the U.S. The caveat is that the ongoing U.S./China trade war spat, which may have no impact on Valeant’s business, may explain the stock’s correlation with the markets. The 14% growth from the vision care unit is due mostly from the strength in China and the Asian-Pacific region.
Financials
Valeant’s debt levels could limit the rebound potential for investors in the near-term. In Q1, the company ended with $25.6 billion in the books and $900 million in cash. The company still has plenty of work ahead to cut the debt but has the time to do it. Valeant does not have any big loans due in the near-term.
Takeaway
At $20 a share, VRX stock is more attractive for investors who missed the rally.
