Concordia Healthcare: Calling All 'Cigar Butt' Investors

| About: Concordia International (CXRX)


Potential buyers walking away causing shares to plummet -24% intraday.

Don't expect any more acquisitions until the debt issue is sorted out.

Massive debt may result in asset liquidation.

Bankruptcy unlikely, volatility guaranteed.

Concordia Healthcare (NASDAQ:CXRX) is a company which relies on acquiring legacy (off patent) and orphan drugs. The stock has collapsed -72% from its September 2015 high, as Concordia, known as "Baby Valeant" to the media, was sold off alongside Valeant Pharmaceuticals (NYSE:VRX) due to concerns over its highly leveraged roll up business model. Concordia shares are trading at a ridiculously low valuation, but there is a lot of debt. Concordia has been facing serious resistance at the $40 level and has started to drop down to the 30s, as potential takeover candidates start pulling out. Potential purchaser Blackstone (NYSE:BX) backed out of a potential deal causing shares to plummet -24% intraday on June 2. There's no question that Concordia is not for the faint of heart, as its been one of the most volatile stocks on the TSX. Investors with a "cigar butt" approach may be all over the stock because of its ridiculously cheap valuation, but it remains a "cigar butt" because of its poor overleveraged strategy to acquire companies.

Massive debt may result in asset liquidation

Like Valeant, Concordia was able to acquire many companies through debt, it has now accumulated over $3.3 billion in long-term debt, 31% of which is due within the next five years. Although I do not believe Concordia may go bankrupt as a result of this massive debt, I do believe they may follow the same damage control strategy that Valeant took by liquidating their non-core assets to raise funds to pay back its massive debt. The debt-to-equity ratio is now at a worrisome 2.87 and the company has had a negative return on equity of -4.7% which shows that Concordia has been very inefficient at generating profits. Concordia made $4.3 billion worth of acquisitions last year, most of it, $3.5 billion, came from issuing interest bearing debt, $203 million of which is short-term and the rest of it is long-term. Last year Concordia paid back $43 million worth of interest and will rack of a hefty interest bill if the acquisitions don't work out.

Can Concordia pay back its debt in time?

Concordia believes cash flows will offer liquidity to pay back this debt and that they will not face the same fate as Valeant. I believe this to be true, as Concordia currently has an impressive free cash flow margin of 31.8% with a healthy operating margin of 20.1% over the last year. Sales in the last quarter gave mixed reactions, but its important to note that the AMCo and Corvis acquisition synergies have not fully been factored into the results. Revenue was at $228.5 million for Q1, with 61.2% coming from the international division, 37.6% coming from North America and 1.2% coming from its orphan drugs division. It is very difficult to say whether or not Concordia will be able to pay off its debt in time because the latest report does not give a clear indication whether or not the company is headed in the right direction, as the earnings missed analyst expectations. CEO Mark Thompson said in his conference call that the business was "firing on all cylinders", but don't take his word for it, as I find it highly unmotivating that potential takeover candidates have been walking away in such a hurry. Don't expect any more acquisitions from Concordia's part until the debt is brought back to more reasonable levels, which may or may not require divestment of its assets over the next few years.

Valuation and Conclusion

Concordia is a speculative gamble, no doubt about it. The stock could double as easily as it could half. This depends on whether or not Concordia can sustain itself with free cash flow and pay back its debt before it has to liquidate its assets. The forward P/E is 3.1 with a 1.2 P/B, which is dirt cheap, but as Warren Buffett used to say: buying "cigar butts" may not be the best investment strategy for the long run. There's no question that Concordia pulled a Valeant by financing acquisitions through massive amounts of debt, and this makes Concordia the riskiest thing next to Valeant. If Concordia can show impressive earnings going forward, the stock will soar as it pays back its debt, but if earnings misses are in the future then be ready for huge drops followed by a massive divestment of previous acquisitions. S&P currently rates Concordia with a B rating, which isn't investment grade. Personally, I can not recommend this stock because of the high risk that's involved, volatility has been off the charts and it will continue to be. I've been hearing rumors of bankruptcy and that's never a good sign.

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.