Valeant Restatement Goes From Catastrophe To Non-Event In 12 Hours

| About: Valeant Pharmaceuticals (VRX)

Summary

News broke last night that VRX was going to have to restate earnings, the stock fell to $68 after hours.

Later in the evening it was announced the restatement would only be for a small amount.

This morning, the stock is trading near $80.

By Parke Shall

Those who were selling off Valeant (NYSE:VRX) on the news of yesterday's restatement by the company have awoken this morning to find a harsh reality: shares are now advancing upwards and are green trading at almost $83 per share.

All day yesterday, VRX was trading as though something had gone horribly wrong. The stock looked sick. There were negative analyst notes that were out late last week, but the stock's continuation of its rapid decline yesterday had many traders on social media speculating as to whether or not new bad news was starting to leak.

Compounding these fears and driving them forward was the fact that the company was still mum on when it was going to be doing it's earnings call. Many traders made the logical assumption that because there is a hold up with the earnings call date, that something involving the financials or perhaps the auditors was taking place behind the scenes.

Also during yesterday's training session, there was a great article written here by SIRF, who follows the Valeant story, detailing the CEO's egregious use of private jets. This was also helping the negative sentiment stick around during the day.

Yesterday afternoon, The Wall Street Journal reported a scoop that the company was expecting to restate it's earnings. This is what the original story said,

An internal review at Valeant Pharmaceuticals International Inc. has raised questions about its accounting practices that will likely prompt the restatement of past financial results.

Valeant said late Monday night that it believes about $58 million of revenue recognized in late 2014 should have instead been booked the following year. ​The misstatements are related to shipments of some Valeant products to a distributor, Philidor Rx Services LLC, which has been at the center of a turbulent few months for Valeant.

The scoop was slightly fuzzy on the details and the Journal later published an update to its original article, reminding readers that the restatement had not yet been confirmed. The stock sold off heavily on the news. After finding itself down almost 10% in the regular trading session, VRX advanced even lower after hours, hitting new 52-week lows near $68 per-share. The negative sentiment and negative rhetoric was all over social media and on television, as people lined up to be the first to say that this could be the end for the company.

But it wouldn't be Wall Street if there wasn't an extremely material plot twist. Late last night, it was revealed that the company is in fact going to restate earnings, but that the restatement was so insignificant that it wasn't really going to make a difference. Fortune, with the follow up story, noted,

The company said it would delay filing its 10-K as it awaits completion of the review of related accounting matters.

Valeant said the restatement will reduce its reported 2014 GAAP earnings by about 10 cents per share and increase 2015 GAAP earnings by about 9 cents per share.

All of a sudden the momentum was back behind VRX in a positive fashion to start this morning. An increase? Offsetting restatements?

Shares have traded higher this morning and are now getting ready to once again push $80 per share. It seems as though what was looked at as a potentially catastrophic event last night has become nothing more than a formality that is now been glazed over by Wall Street.

This volatile swing is a nice reminder of how quickly things can change on Wall Street and how it is very difficult to make an informed decision based on a news report that does not have all of its facts.

At this point, we definitely see the bull and the bear case. The bull case is that the company is set to do somewhere between $8 and $13 in EPS in the coming year and looks to be extremely undervalued on an earnings basis.

From a fundamental perspective, the restatement including such small moves in EPS would essentially be meaningless for VRX moving forward. So much of the company's share price is predicated on how investors believe the company will perform once it pulls itself out of the limelight.

According to Yahoo Finance, the company is expected to do $10.28 this year and $13.44 next year. The restatements occurring represent just about 0.1% of the company's full year earnings for this year, making them immaterial but for having to perform the restatement in and of itself.

Conversely, on the bear side of the equation, we don't know what other trapdoors could be coming down the road for a company that has been under fire now for the better part of six months straight.

We have no position in VRX, but we continue to watch the story and will update our readers with further analysis as it moves forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.