Is Bausch & Lomb's Distress an Opportunity for Investors? (BOL)

| About: Valeant Pharmaceuticals (VRX)

Bausch & Lomb (BOL) has a pretty serious two-front problem: accounting issues, and a fungal eye infection that may be linked to their ReNu cleaning solution, although attempts to confirm that have so far been ambiguous. As a result, the stock has dropped from $69 to around $47 -- a 32% drop. Is that an opportunity, or not?

The last quarterly report they filed was for calendar Q2 2005, pretty outdated, but it will give us something. For the 6 months ending with that quarter they showed $1.1626B in revenue with Y/Y growth of 8%, and $0.2685B coming from "Lens Care" also with 8% Y/Y growth in that segment. The WSJ reports (sub. req.) that so far they have reported about $9M in sales reductions over 3 1/2 years due to accounting errors, and that they typically trade at a P/E of 20, although it is now 13. There have been 30 confirmed eye infections, 26 of which used ReNu, and ReNu was used by 10M Americans.

The fact that there are counter-examples to the ReNu-causing-eye-infection theory says pretty boldly that it is probably not the culprit, so we expect them to eventually have no liability. Nevertheless, we will kill off all their Lens Care sales, use an arbitrary 10x factor on the accounting issues and plug it into a single year, since those tend to blow up larger than at first estimated, and annualize the numbers from above assuming no growth. That gives annual estimated revenue of $1.7B (2x($1.1626B-$0.2685B)-$9Mx10).

They don't break out expenses by segment, so we will just assume all the expenses remain and continue going forward. That gives operating expenses of $2.0438B ($1.0219Bx2). So, under perfectly plausible, but harsh, assumptions, they may be showing losses going forward.

Here's another way to see the problem: they only had annual $281M ($140.7Mx2) in earnings before any of the problems surfaced, and those problems have put, at a minimum, something like $537M (2x$268.5M) in annual revenue in jeopardy.

On the other hand, if they get both issues resolved, and the numbers go back to what they were, then their current share price drop provides a nice opportunity. You will likely have noted that there is a lot of slop between those two possibilities, but financial projection is NOT science, and does not allow for any sort of real precision, although most people act like it does.

We could use very specific numbers, and make very specific projections, and then be very wrong because our false precision was garbage. Instead, what we like to do is properly recognize the slop, and look for opportunities that are good even outside those wide error bar ranges.

BOL isn't quite there. One might make good money on them by buying now, but it's gambling.