Bill Miller: Valeant Can Double in 3 Years
- By Bram de Haas
Bill Miller is an interesting value investor, as he is generally very outspoken. He made an appearance on CNBC and talked about Valeant (VRX). You may be scrutinized if you are long Valeant after the ousting of its CEO, the Philidor incidents, Charlie Munger (Trades, Portfolio)'s distaste for the company and Hillary Clinton's special attention to price gouging.
Warning! GuruFocus has detected 5 Warning Signs with VRX. Click here to check it out.
The intrinsic value of VRX
There is a lot not to like.
And that is precisely why Miller likes it. He calls it the most toxic stock in the market.
"It cost Bob Goldfarb his job and blew a hole in Bill Ackman (Trades, Portfolio)'s portfolio," Miller said.
That is what is keeping the price of the stock down, but he also sees a lot to like:
There is a new chief excecutive officer
There is a new chief fincancial officer
The company has great cash flow
Essentially, Miller views the investment as a public LBO (leveraged buyout). In a leveraged buyout, a private equity group buys a public company without much debt by using a lot of debt. Subsequently, they improve operations and sell off assets to pay down the debt to manageable levels quickly. If it succeeds, tremendous gains can be had with this strategy.
Although the game plan with Valeant is similar, use cash flow and sales of non-core assets to delever, with a public company this is much more difficult to do. Leverage problems that are out in the open can create difficulties that would not have occurred for a private company.
It will be a crucial year in 2018, as a lot of the debt is due:
Near term, the outlook is not very bright. The stock has sold off quite a bit and Miller expects the quarter will be pretty bad with a new CFO coming in to take a fresh eye to the business.
The market is anticipating a bad quarter. However, the debt market is not showing signs of distress (recently, the company successfully amended some of its covenant through cooperation of the lenders).
The most important thing to Miller seems to be the 25%-30% free cash flow yield, which is key to paying down the debt without having to shed too many assets.
I have owned shares of Valeant since June of this year, and, for what it is worth, agree with Miller's basic thesis.
Miller says the company could sell Bausch & Lomb (one of its core assets) for more than its entire market cap. That is probably true since it bought Bausch & Lomb in 2013 for $8.7 billion, a billion above its market cap.
He does admit Valeant is not going to sell, and I would add that it would not do that much good because Valeant's market cap is way short of its enterprise value of $38 billion. As shareholders, we only start making money after debt holders have been satisfied. Therefore, the market cap does not mean much for now.
Can Valeant double in 3 years?
This is a fairly credible claim. In three years it will be 2019 and it will have been do or die for Valeant, which is the crux of the matter. A double is possible, but a Chapter 11 filing is not entirely out of the question.
As a shareholder myself, my bet is on the double. Free cash flow and several non-core asset sales should take care of the 2018 maturities. If free cash flow of the remaining assets can grow while pipeline assets add incremental growth or get sold as well, we will be looking at a whole different value by then.
For example, it could reach $16 billion in debt by the end of 2019, mostly through paying off debt from free cash flow and several non-core asset sales ($4 billion) and possibly pipeline sales.
Free cash flow could grow to $4 billion because of $15 billion in debt repayments and a little bit of free cash flow growth. This is reasonable as Valeant has quite a few drugs in its pipeline and no huge pending patent cliffs.
With debt just 4x free cash flow, instead of 10x and much higher free cash flow, the market will assign it a much higher multiple than today's. At just a 10x EV/FCF multiple, the enterprise value would end up at $40 billion given the paid-off debt would put equity at $24 billion, or a triple from today.
This may appear a bit optimistic, and in reality there are thousands of possibilities (including a potential Chapter 11 filing), but I am interested in acquiring shares at a very low cost and seeing where Valeant goes.
Disclosure: Author is long Valeant Pharmaceuticals.
Start a free 7-day trial of Premium Membership to GuruFocus.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Signs with VRX. Click here to check it out.
The intrinsic value of VRX
