Should You Book Profits In Bausch Health Companies Stock After A Solid 2x Rally?

BHC: Bausch Health Companies logo
BHC
Bausch Health Companies

After a solid 2.4x rise from its March 2020 lows, at the current price of $31 per share, Bausch Health Companies’ stock (NYSE: BHC), best known for its contact lenses and branded generic drugs, appears to be fully valued. BHC stock has rallied from $13 to $31 off the March 2020 bottom compared to the S&P which moved 75%. BHC stock has outperformed the market given its better than expected quarterly results of late, as well as due to an increased investor attention after billionaire hedge fund manager Carl Icahn took a little under 8% stake in the company. Also, the stock is up 25% in the last one year despite revenue falling 7% y-o-y over the last four quarters. While the gradual opening up of the economy is expected to lead to higher demand for Bausch Health’s products, the stock appears to be richly valued when compared to its historical levels, making it vulnerable to downside risk. Our dashboard Buy Or Fear Bausch Health Companies Stock provides the key numbers behind our thinking.

BHC stock is also up 68% from the levels of $18 seen toward the end of 2018. Most of the stock price growth since 2018 can be attributed to the expansion of the company’s P/S multiple. Looking at fundamentals, total revenues declined 5% from $8.4 billion in 2018 to $8.0 billion in 2020, partly due to the impact of the pandemic on overall sales. This clubbed with a 1% growth in  total shares outstanding, due to share issuances, has meant that the company’s revenue per share (RPS) declined 5% to $22.69 in 2020, compared to $23.88 in 2018.

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Despite the company posting a decline in revenue, the P/S multiple expanded from less than 0.8x in 2018 to over 1.3x in 2020. The P/S multiple is currently at 1.4x, which we believe is high and compares with levels of under 0.9x seen in 2017 and 0.8x seen in 2018.

Outlook

The coronavirus crisis induced lockdown affected the hospital visits, and in turn, the pharmaceutical sales for several healthcare companies, including Bausch Health. The sales were also impacted due to loss of market exclusivity for some of its products. Now with the economy gradually opening up, Bausch Health’s business is also seeing an increase in demand. The company reported revenues of $2.2 billion in Q4 2020, in-line with the prior year quarter, and reflecting a 4% growth sequentially.

The recent rally in BHC stock was led by multiple factors, such as better than estimated Q4 results, Carl Icahn’s stake in the company, and finally the company’s decision of separating itself into two different businesses, unlocking shareholder value. While Bausch + Lomb will be a fully integrated eye-health company, the other company will be a diversified pharmaceutical company.

While Bausch Health will likely continue to see increased demand in the near term, any further recovery in the economy and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Currently, investors seem to be buoyed by Bausch Health’s restructuring plans along with a positive revenue and earnings outlook based on the expected recovery in economic activity, and that appears to be priced in the current stock price of $31, in our view. Even if we were to look at the forward RPS estimate of $24.22 for Bausch Health in 2021, at the current price of $31, it is trading at a 1.3x P/S multiple, which is higher than the levels of under 0.9x seen in 2017 and 2018, making the stock appear vulnerable to downside risk.

While Bausch Health stock looks overvalued, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Abbott vs Corcept Therapeutics.

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