Bausch Health Companies Inc (TSX: BHC) is a multinational, specialty pharmaceutical and medical device company that develops, manufactures and markets a broad range of branded generic pharmaceuticals, over-the-counter products and medical devices.

Why Should Investors Book Profit?

• Weak liquidity profile: In Q3 FY21, the company's current ratio was 0.98x compared to the industry median of 2.97x, while the quick ratio stood at 0.78x compared to the industry median of 1.55x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 169.5 days compared to an industry median of 124.1 days.

• Higher average collection period: BHC is having a higher average Accounts Receivable day of 72.0 days, against the industry median of 65.8 days. Furthermore, its increasing on the sequential basis. A higher average collection period indicates that the organization is collecting its payments at a slower pace. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.

• Stretched Valuation: BHC’s shares are available at an NTM EV/EBITDA multiple of 8.2x compared to the industry (Pharmaceuticals) mean of 2.9x. While on NTM Price/ Cash Flow multiple it trades on 4.7x against an industry mean of 3.7x. This implies that the shares are overvalued against the industry.

Valuation Methodology (Illustrative): EV to EBITDA

*1USD=1.27CAD

Analysis by Kalkine Group

Stock recommendation

The company’s Q3 2021, results demonstrated impressive overall company growth as the businesses continue to recover from the COVID-19 pandemic. The group witnessed strong performance with market share gains for many of its leading brands and strong cash flow generation in the recent quarter. However, when compared to an industry median, the company's liquidity ratios are on the lower side, and its cash cycle days are on the higher side. This could be a lag in terms of working capital management side. Also, the Negative ROE is one of the most crucial factor which could erode the investors interest in the stock from an investment perspective.

Additionally, its average A/R days are also increasing on the sequential basis and is above the industry median numbers, this may create a difficulty for the company to have enough cash on hand to meet their financial obligations. Moreover, the company is carrying a high debt burden on its shoulders, which implies a huge balance sheet risk. Along this the stock of BHC is trading on stretch valuations on multiple parameters. Hence, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 31.35 on February 3, 2022.

One-Year Technical Price Chart (as on February 3, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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