Best known for its Bausch + Lomb products and generic pharmaceutical products, Bausch Health Companies Inc. (BHC) has been steadily recovering from the coronavirus-pandemic-led public health crisis that severely affected its sales and the sales of several pharmaceutical companies. The stock has gained 57.3% over the past year.
BHC reported strong fourth quarter results, outperforming its revenue guidance range, despite unprecedented challenges resulting from the pandemic-related downturn. Moreover, investors’ optimism surrounding the company’s recent agreement with the Icahn Group regarding the appointment of new Board members, and a planned business spin off has helped the stock gain lately.
As BHC continues to make investments to drive its long-term organic growth, its stock is expected to generate greater momentum in the near term. And given its relatively lower valuation, we believe the stock has plenty of upside. BHC has gained 60.1% over the past three months, and 58.5% year-to-date.
Let me prove why BHC could soar in the near term:
Investors’ Optimism About a New Agreement
Last month, BHC entered an appointment agreement with the Icahn Group, under which Brett Icahn and Steven Miller will be appointed to the company’s Board as new independent directors, effective in mid-March. Furthermore, the Icahn Group owns approximately 7.8% of BHC's outstanding common stock. The agreement has garnered significant investor attention since the company believes that Icahn’s and Miller’s extensive transaction experience should help BHC make significant progress in the eye health business, gain market share in key growth areas, and drive further value for shareholders.
Establishing an Independent Business
Since its announcement last year of plans to spin off its leading eye health business into an independent, publicly traded entity r, BHC has made significant progress towards administering the transaction. We believe the independent businesses should not only enhance financial transparency but should also allow shareholders to value those stand-alone companies independently. If successful, this development should drive the company’s long-term growth.
Strong Financials
BHC’s Salix segment revenue increased 2% year-over-year to $527 million in the fourth quarter ended December 31 driven primarily by increased sales of XIFAXAN and TRULANCE, which grew by 4% and 33%, respectively. Its adjusted non-GAAP net income grew 18% from its year-ago value to $478 million, while its cash generated from operations rose 68.4% year-over-year to $394 million.
Discounted Valuation
In terms of non-GAAP forward p/e, BHC is currently trading at 7.42x, 68.7% lower than the industry average 23.68x. BHC’s forward PEG of 1.21x is 37.2% lower than the industry average 1.93x. Also, the company’s forward ev/sales of 4.08x is 44.4% lower than the industry average 7.34x.
Impressive Revenue and Earnings Outlook
Analysts expect the company’s revenue to increase 2.7% in the current quarter, 8.3% in the current year and 4.1% next year. Its EPS is expected to grow 10.2% in the current quarter, 11.6% in fiscal 2021 and 12.6% next year. Moreover, BHC’s EPS is expected to grow at a rate of 7.5% per annum over the next five years.
Favorable POWR Ratings
BHC has an overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. BHC has a Value Grade of A. This is justified given the stock’s relative undervaluation.
It also has an A grade for Growth, consistent with the analyst expectations that revenue and EPS will increase.
Click here to see the additional POWR Ratings for BHC (Stability, Sentiment, Momentum and Quality).
The stock is ranked #21 of 240 stocks in the Medical - Pharmaceuticals industry.
There are several other top-rated stocks in the same industry, click here to access them.
Bottom Line
BHC has delivered strong results for its last reported quarter, which reflects a solid business recovery from the pandemic. Meanwhile, the company’s strategic spin-off and Board appointment agreement should position it well to deliver long-term value to its shareholders. Given its strong growth potential, relative undervaluation and a healthy cash position, we think BHC will keep gaining in the coming months.
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BHC shares were trading at $33.81 per share on Wednesday morning, down $0.12 (-0.35%). Year-to-date, BHC has gained 62.55%, versus a 4.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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