Saturday, April 10, 2010

Valeant Pharmaceuticals

After a break for Easter it is time to conclude my battle of the growth stocks. Last up is Valeant (VRX), a speciality pharmaceutical company that also has a branded generics branch.

Michael Pearson has recently taken over VRX and has been turning it around. He has been aggressively buying back stock, restructuring the debt and acquiring new products. The strategy appears to be working as revenue is up 30% year on year while the share price has more than doubled.

Here are the fundamentals:

Market Cap: $3.4 Billion
Dividend Yield: 0%
Cash: $80 Million
2010 PE: 16
Predicted Growth Rate: 20% annual

The fundamentals looks great but when you look more carefully at the balance sheet things get a bit messy. VRX has almost $1 Billion in liabilities and a current ratio of only 1.4. Michael Pearson is using debt to buy back shares, pay off old debt and acquire more companies. This may be the right thing to do but it does increase the risk. For someone who does not have the time to analyse the debt structure all these liabilities are a bit of a turn off.

The other risk is that Michael Pearson may find greener pastures elsewhere. VRX's turnaround seems to be based on his energy and vision rather than any competitive advantages that VRX has. Therefore it does not have the protective moat around it business that Warren Buffett loves to talk about.

Here is the scorecard:

Growth Potential: 7
Risk: 5 (low score means high risk.)
Valuation: 7

That gives VRX a score of 19 out of 30.

And now for a confession. I have already made my decision and bought Apple. Intuitive Surgical and Amazon were too expense. VRX lacked a competitive advantage. Apple has great products, millions of loyal fans and is using its success with iPods and iPhones to introduce the public to its more expensive, higher margin products like iMacs. Most importantly the valuation is reasonable. I think subconsciously people think the stock is expensive as it over $200. The fundamentals suggest otherwise.

I should have the opportunity to buy into another growth company this year so I will be keeping an eye on Amazon and Intuitive Surgical.

Thanks for reading!