tag:blogger.com,1999:blog-8152901575140311047.post1702462816198483393..comments2017-04-29T05:05:21.024-04:00Comments on Musings on Markets: A Valeant Update: Damaged Goods or Deeply Discounted Drug Company?Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-8152901575140311047.post-54943031122887307672017-03-25T03:49:12.138-04:002017-03-25T03:49:12.138-04:00Many thanks Professor!
A couple of questions/comm...Many thanks Professor! <br />A couple of questions/comments:<br />- can you share the xcl backup of your statistical analysis, for eveybody's learning?<br />- debt position after the recent divestment is about 28bn not 30bn;<br />- tax shield, understood that, at enterprise level, your pie to ALL stakeholders (equity, debt and government) shrinks if tax rate is reduced but, if our attempt is to estimate the share price (value to equity), should we not see a tax cut as a positive since more cash is left to shareholders?<br />- you apply a prob if default of 10%, although 1.8 bn looks more like a 5% haircut. Is it fair to say that, given the recent refinancing, bankruptcy is very unlikely to happen in the next 12-18 months? If so, is it correct to ignore this adjustment with a view to buy (very low) now and sell say in one year. I am pointing this out because 1.8bn is about 35-40% of yoour equity value. This plus the 2 bn of repaid debt gives room for an upside to your estimated price of 13.68 of almost 80%. Which in turn would make the current price extremely convenient in the short run (before bankruptcy risk is priced in by the market).<br /><br />Thanks and best regards from Bangkok!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-3851813513858896852017-03-24T12:55:38.792-04:002017-03-24T12:55:38.792-04:00Dear Professor,
Thank you for your updated view o...Dear Professor,<br /><br />Thank you for your updated view on Valeant. It is my pleasure to follow your posts.<br />In your latest valuation, Sheet Cleaned Up Operating Income, Cell D10 Reinvestment needed for 2.25% growth you keyed in a D9*1.5%*9% <br />I would think you mentioned 2.4% for current Risk free rate or 2% for long term growth of Valeant. Is it a typo? <br />Thank you <br />aphonghttp://www.blogger.com/profile/01991264501960010906noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-13075370561396420132017-03-24T11:40:19.037-04:002017-03-24T11:40:19.037-04:00Professor,
A few things I think are a bit off in ...Professor,<br /><br />A few things I think are a bit off in the DCF:<br /><br />-Debt is too high. It should be adjusted pro forma to account for recent asset sales in 1Q16. Alternatively the asset sales should be included in FCFF for 2017.<br /><br />-Given VRX's clear runway for debt paydown given recent refinancing, I think that holding a 9% discount rate into year 5 may be a bit punitive. 3 years seems fair, but after that it should be de-risked.<br /><br />-Your revenue projections after 2017 run pretty strongly against management guidance. You may be right, but need to articulate why their growth guidance is incorrect.<br /><br />-VRX will still have a tax shield for some time due to amortization of recent acquisitions. This is not included in the DCF.<br /><br />-Why is reinvestment so high in the terminal year? This crushes the terminal value, but I don't understand the rationale for that big of a jump in reinvestment without different growth assumptions in year 11+ versus years 5-10.<br /><br />-It might make more sense to give a probability-weighted tax code adjustment rather than just jumping to 30%. Tax codes are pretty difficult to change...Rexnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-31705975385224693752017-03-24T07:54:44.848-04:002017-03-24T07:54:44.848-04:00Dear Prof,
I like your work. Your analysis are us...Dear Prof, <br />I like your work. Your analysis are usually high value and detailed build up. Great example of professional finance work.<br /><br />On your last Valeant calculation I think you made a logical error. In your revenue you have already used the guidance which includes the impact of divestments. But on the debt you were looking at the pre divestment value.<br />I think it would better reflect reality if with your current top line numbers you would use a lower debt of around 28-29Bn as a starting point.<br />Zoltan Takacshttp://www.blogger.com/profile/11680241939795637279noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-6229084929847492952017-03-24T06:14:57.364-04:002017-03-24T06:14:57.364-04:00We should come back to what Buffet says: It's ...We should come back to what Buffet says: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.Ianhttp://www.blogger.com/profile/11137974214784336083noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-83215544055768850102017-03-24T06:05:09.433-04:002017-03-24T06:05:09.433-04:00Professor,
Thanks for doing this. I have a couple...Professor,<br /><br />Thanks for doing this. I have a couple of questions in regards to your valuation:<br /><br />1) CEO Joe Papa, has said they want to pay now $5bn worth of debt by end of 2017. $1bn-ish has been paid so far, there are pending asset sales for 1.78bn, and so roughly 2-2.5bn is the debt goal target. I assume this is paid by FCF and further asset sales. So why don't you account for this in the valuation, and see the value per share?<br /><br />2) I see from your valuation, you are discounting the Future cash flow and for a firm value, netting out the debt, to give the equity value per share....But Valeant is like a public LBO, so why not model for this: For instance, Take a house worth $100,000. And we buy it with 10% equity, $10,000 and mortgage for $90,000. If we assume that the value of $100,000 is the intrinsic value and is constant, and the net rent yield is 5%, i.e. $5,000. Every year I use the cashflow to pay my mortgage, then by year 3, my house is still worth $100,000, but my equity value is $25,000 and the mortgage is $75,000.<br />So my point is, why in your valuation, do you not just say all FCF be used to pay the outstanding debt, Because if the 2016 EBIT = $3105.86 and interest expense is $1836. Then we still have FCF of $1269.86 which can pay down debt in 2017 If this figure is roughly the same...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-10830194183475495602017-03-23T15:58:15.952-04:002017-03-23T15:58:15.952-04:00Thank you for the brutal honesty in your posts, Pr...Thank you for the brutal honesty in your posts, Prof. <br />A clarification request too: In your Nov 22nd, post your<br />breakdown of the drop in operating income table has numbers I could not replicate.<br /><br />Here are the major offenders in my view:<br />1) You have:<br />Declining Revenues : $(317)<br />Change in Gross Margin : $(192)<br />Change in Operating Income, , First 3Q 2016 vs First 3Q 2015 : $(2,077)<br /><br />2) From the actual 10K, I get figures as seen below:<br />Declining Revenues : $7,271 (Q1 through Q3 of 2016) - $7,689 (Q1 through Q3 of 2015)<br /> = $(418)<br /><br />Change in Gross Margin : (($7,271-$1,946)/$7,271 ) - (($7,689-$1,855)/$7,689 ))<br /> = 75.87% - 73.24%<br /> = 2.63%<br /><br />Change in Operating Income, , First 3Q 2016 vs First 3Q 2015 : $(2,077)<br /> = -$716 (Q1 through Q3 of 2016) - $1366 (Q1 through Q3 of 2015)<br /> = $(2,082)<br /><br />Any clues for wretches as I attempting to piece together the real numbers ? (In this case, the conclusions drawn by this table are still intact I think even if your numbers are wrong. <br /><br />Thank you,<br />Apprentice of Agamashttp://www.blogger.com/profile/00336510029421716346noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-48880506397328988872017-03-23T15:29:16.273-04:002017-03-23T15:29:16.273-04:00Dear Prof - Seems like you have some unrealized ...Dear Prof - Seems like you have some unrealized short term tax loss that could be used to offset capital gains now or in future. Even if this story get's a new life, the chances of it happening in the next 30 days are slim. So why not sell at least some of your VRX holding, capture ST loss for tax purpose and then decide to buy the shares back or not after 30 days?XFLhttp://www.blogger.com/profile/01180488577665672291noreply@blogger.com