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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 Clearly the latter part of that assumption is no longer valid given the deterioration in the core business that is likely permanently impaired.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.


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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


Daily Market Data Dump: Thursday

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, and key currency crosses. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Thursday - equity markets 7 14

 

Daily Market Data Dump: Thursday - sector performance 7 14

 

Daily Market Data Dump: Thursday - volume 7 14

 

Daily Market Data Dump: Thursday - rates and spreads 7 14

 

Daily Market Data Dump: Thursday - currencies 7 14


The Big Healthcare Themes - Institutional Call Today

Takeaway: We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable.

The Big Healthcare Themes - Institutional Call Today - z hc

 

Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman will provide a comprehensive overview 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.

 

The chart below is from our team's +100-slide deck.

The Big Healthcare Themes - Institutional Call Today - z xxc

 

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.

 

**Email sales@hedgeye.com for access.


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