It was not meant to be. Valeant Pharmaceuticals (NYSE: VRX) stock show to above $22 a share after the company refinanced its upcoming debt. Demand for its debt was so strong that the company could upsize its debt. With that in mind, does JPMorgan’s downgrade of VRX make sense?
JPMorgan (NYSE: JPM) set a $12 price target and an "underweight" call on VRX stock. It cited unfavorable valuations based on 2018 estimates for the downgrade. Still, Valeant had a strong run-up for the last quarter. A pullback is expected. What happens next will matter more.
At a 5x P/E and forward P/E, Valeant is still under-valued. Though its past growth rates should be ignored (61% EPS growth in the last five years), the future growth rates are still unclear. Expect Valeant’s EPS falling next year as the business shrinks, non-core assets sold, and debt cut down.
Valeant’s earnings growth will depend on B+L and Salix both growing revenue in the mid- to high-single digits. It’s unlikely, but not impossible, that management succeeds in delivering higher growth earlier. IF that happens, then the retracement of the recent rally will end soon.
Time will tell.
Valeant’s volatility on the stock market will make money for both longs and shorts.
