After 35% Decline Does Bausch Health Companies Stock Look Attractive?

by Trefis Team
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Bausch Health Companies (NYSE: BHC), best known for its contact lenses and branded generic drugs, has seen its stock fall more than 35% year-to-date, as the coronavirus pandemic is expected to have a meaningful impact on its businesses. BHC stock also remains down by about 11% from levels seen in early 2018, a little over 2 years ago. With economies opening up there will be an increase in number of prescriptions issued and retail sales, driving the demand for the company’s products. While the company has seen steady earnings growth over the recent years and its P/E multiple is lower compared to historical years, making it  potentially attractive, investors might want to wait for lower levels to enter BHC stock, given that the company has a huge debt to cater to with limited cash generated from its operations. Our dashboard, ‘What Factors Drove -11.1% Change In Bausch Health Companies Stock Between 2017 And Now?‘, has the underlying numbers.

Steady Earnings Growth But Stock Down

BHC’s revenue declined 1.4% from $8.7 billion in 2017 to $8.6 billion in 2019, primarily due to de-consolidation of some of its non-core business.  The company’s adjusted net income (as reported in the company’s SEC filings) grew 15.6% from $1.4 billion to $1.6 billion over the same period, driven by a 250 bps margin expansion from 15.5% to 18.1%. Adjusted EPS grew 15.5% over the same period to $4.43, with no change in number of shares. However, despite the steady growth in its financials, BHC stock price depreciated due to the contraction of its P/E multiple from levels of around 5.4x in 2017 to about 4.2x currently, as the coronavirus pandemic clouds the company’s outlook.

Why The Stock Price Could Underperform?

BHC stock has dropped this year largely due to pessimism surrounding its generic pharmaceuticals business. Given the pandemic and lockdowns imposed in several cities, people are avoiding non-essential visits to doctors, which, in turn, translates into lower prescriptions being issued. Moreover, with several retail stores closed, the sales for Bausch+Lomb contact lenses has likely declined. However, with the global economies gradually opening up now, the prescriptions issued are expected to rise, and aid BHC’s pharmaceuticals business. Beyond the sales for the company, the pessimism in the stock can also be attributed to its huge debt of $24 billion vs. a cash balance of $2 billion, and $1.5 billion in cash from operations. Stocks of companies that are highly leveraged usually do not perform well in a time of crisis, as investors look for safety.

These are extraordinary times for businesses and the question really is, despite the expected headwinds, is BHC stock a good buy after such a decline? The 11% decline in the stock price since 2017 is largely driven by the P/E Multiple contraction from 5.4x to 4.2x, reflecting a 23% decline. While the current multiple is lower when compared to its historical levels, we believe that the stock could remain rangebound around the current levels in the near term. Firstly, its high level of debt remains a concern in the near term. Secondly, going by the consensus EPS estimate of $4.04 for BHC in 2020, and a P/E multiple of 5.6x (midpoint of the range seen in the recent years), it translates into a price of $19, which is roughly the price the stock is currently trading at.

Looking for safety and dividends in health care sector, consider buying Johnson & Johnson.

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