prev

Valeant Bankruptcy Risk Is Rising | $VRX

Takeaway: "The probability of a Valeant bankruptcy is high, and the probability that we see a sub-$20 stock over the next 12-months is even higher."

Valeant Bankruptcy Risk Is Rising | $VRX - Ackman cartoon 10.26.2015

 

In November, our Healthcare analysts Tom Tobin and Andrew Freedman wrote the research note: "VRX | Bear Case $20." The stock has plummeted since then -- down -75%.

 

Here's an exclusive update from Andrew Freedman:

 

"Our $20 “Bear Case” valuation was based on acquisition price of the assets less accumulated debt and assuming the assets perform on par with historical trends. Clearly the latter part of that assumption is no longer valid given the deterioration in the core business that is likely permanently impaired. With $18.6 billion of Goodwill on the balance sheet and the stock down 91.8% from its peak, the market is already telling us that Valeant overpaid for these assets. We are surprised that Valeant has yet to take a write-down to reflect this reality.

 

The probability of a Valeant bankruptcy is high, and the probability that we see a sub-$20 stock over the next 12-months is even higher. At this stage, it makes more sense to sell the company off in pieces, repay debt holders, give what is left over (if anything) to stockholders and call it quits."

 

Chart below is from March, 17 2016.

Valeant Bankruptcy Risk Is Rising | $VRX - z q

 

Valeant Bankruptcy Risk Is Rising | $VRX - 20160714 VRX Writedown

 

Tobin and Freedman have been laying out the short case for some time. Here's a video from earlier this year which largely predicted what's happened at Valeant, including the precipitous drop in VRX shares and "we would be surprised if Mike Pearson survives as CEO."

 

Click below to watch. It's instructive to understand what's to come. 

 

 

Additional updates worth reading from our Healthcare team:

 


My Thoughts On a ‘Heartbreaking’ Healthcare ‘Horror Story’

 

In this brief excerpt from The Macro Show this week, Hedgeye Healthcare Sector Head Tom Tobin answers a “heartbreaking” question from a subscriber on the collapse of ACA exchanges and the impact it’s having on American families.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


JPMorgan Beat Earnings Estimates? Everyone Beats Estimates

Takeaway: Companies rarely miss consensus earnings estimates. That's why it's the year-over-year earnings and sales numbers that matter.

JPMorgan Beat Earnings Estimates? Everyone Beats Estimates - earnings cartoon 04.25.2016

 

JPMorgan shares are up more than 2% today after reporting earnings that beat consensus estimates. Not so fast. As our Macro team points out in a note sent to subscribers earlier this morning, overcoming analyst earnings expectations isn't the metaphorical albatross the media makes it out to be:

 

"JPMorgan kicked off bulge bracket earnings this morning and the headlines of the top stories all centered around JPM 'beating' estimates. As you can clearly see [in the chart below] where we show an earnings beat/miss heatmap (where companies print relative to where consensus expects) everyone beats estimates. It’s part of modern financial reporting, and much less relevant than Y/Y earnings growth. JP Morgan reported a -1.4% hit to net income in Q2 Y/Y to kick off what we think could be another disappointing earnings season for Q2."

 

In essence, companies rarely miss consensus earnings estimates. That's why it's the year-over-year earnings and sales numbers that matter.  

 

Click the image to enlarge.

JPMorgan Beat Earnings Estimates? Everyone Beats Estimates - earnings beat

 

While we're on JPMorgan...

 

Hedgeye Financials analyst Josh Steiner has the brief breakdown of JPMorgan's results today:

 

 

Here's to digging deeper than perceived reality.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

*LIVE TODAY AT 11:00 AM ET | HEALTHCARE THEMES (CALL DETAILS INSIDE)

Takeaway: We will provide a comprehensive overview of our #ACATaper and Healthcare Deflation themes with new datasets and analysis.

watch THE REPLAY BELOW

CLICK HERE to access the associated slides.

 

3Q16 healthcare themes conference call

We hope you can join us for our 3Q16 Healthcare Themes Call Today at 11 AM ET.  We will provide a comprehensive update of our #ACATaper and Healthcare #Deflation themes with new datasets and analysis.  The U.S. Medical Economy remains extended after the largest expansion in insured medical consumers in a generation.  Slowing growth in medical consumers, continued deterioration in affordability, aggressive payor reforms, company leverage at 15-year highs, and multiples at 10-year highs is a recipe for downside.  We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable, but rather a temporary boost in consumption driven by massive government stimulus.

 

We are also extremely pleased to announce that Emily Evans, Director of Health Policy at Hedgeye, will be joining the presentation and sharing her views on major policy initiatives including Alternative Payment Models, MACRA, and post-acute reform, among other topics that significantly impact our fundamental views.

call details

Toll Free:

Toll:

UK: 0

Confirmation Number: 13640958

Materials: CLICK HERE

 


Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings

Takeaway: Earnings estimates appear untethered from reality.

Editor's Note: This is a special Hedgeye Guest Contributor note written by Mike O'Rourke. Mike is the Chief Market Strategist at JonesTrading where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.”

 

Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - earnings cartoon 04.12.2016

 

Now that Q2 earnings season has commenced, it is an opportune time to examine the expectations landscape. 

 

According to Standard & Poor’s, 2015 earnings finished at $100.45, down from $113.01 in 2014.  The current forecast for 2016 earnings is $113.96. Considering Q1 2016 earnings were down 7% year over year, it obviously makes 13% full year earnings growth a tall order. Per the S&P data, the last 6 quarters have posted year over year declines.  Despite that disappointing trend, Q2 earnings are forecast to rise 7% year over year. As is typical, earnings estimates are very back end loaded, allowing more time to deny reality. 

 

For Q3, earnings are forecast to grow 19% year over year, and in Q4, they are forecast to grow a whopping 37% year over year (chart below).  Of course, quarterly earnings in excess of $30 per share would be new record levels (chart below).  For some reason, this does not seem like an environment primed for posting record quarterly earnings.

 

Certain aspects of the environment that led to the peak in earnings in 2014 softened, but they have not reversed.  The Dollar remains relatively strong.  Although the Dollar index is down 4% from its recent peak, it is still up over 20% from the 2014 level from which it broke out.  While Crude has managed a remarkable rebound from its February low, the average price of spot WTI was $48.65 in 2015, and thus far in 2016, it is just over $40. 

 

The volatility around earnings due to the broad decline should fade and this is expected to be the Energy Sector’s first positive earnings quarter since the end of 2014.  The Health Care sector will be key, and is expected to do much of the heavy lifting for index earnings, growing close to 30% in 2016 (table below).  Considering Q1 earnings for the sector only grew 3.3% year over year, Q2, Q3 and Q4 are forecast to grow 31.7%, 37.7% and 40.5% respectively.  There is not much else based on reality in the markets these days, so maybe there is no reason to expect earnings estimates to be any different.

 

Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - z a

 

Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - z aa


Initial Claims | Tick Tock

Takeaway: Claims have been sub-330k for 29 months, now just 16 months shy of the all-time duration record: 45 months set in the 1990s.

Initial Claims | Tick Tock - Claims1

 

While claims moved momentarily higher in early May, they have resumed a breakneck pace lower for now with the most recent week coming in at an impressively low 254k. However, the keyword here is "breakneck". While the labor market remains strong for now, the current level of claims seems unsustainable in the context of history. The chart below shows that in the last three cycles claims have dropped below and remained below 330k for 24, 45, and 31 months (average: 33 months) before the economy entered recession in the last three cycles. With the current cycle in its 29th month below that level, we are 5 months past the minimum, 4 months shy of the 33-month average, and 16 months from the max. With the market at all-time highs and the labor market classically late stage, we remain bearish.

Tick tock.

Initial Claims | Tick Tock - Claims20 2

 

The Data

Initial jobless claims were unchanged at 254k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.75k WoW to 259k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.1% lower YoY, which is a sequential improvement versus the previous week's YoY change of -4.9%

 

Initial Claims | Tick Tock - Claims2

 

Initial Claims | Tick Tock - Claims3

 

Initial Claims | Tick Tock - Claims4

 

Initial Claims | Tick Tock - Claims5

 

Initial Claims | Tick Tock - Claims6

 

Initial Claims | Tick Tock - Claims7

 

Initial Claims | Tick Tock - Claims8

 

Initial Claims | Tick Tock - Claims9

 

Initial Claims | Tick Tock - Claims10

 

Initial Claims | Tick Tock - Claims11

 

Initial Claims | Tick Tock - Claims19

 

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 81 bps. 3Q16TD, the 2-10 spread is averaging 80 bps, which is lower by -17 bps relative to 2Q16.

 

Initial Claims | Tick Tock - Claims15

 

Initial Claims | Tick Tock - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

Patrick Staudt, CFA

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next