There was much discussion about free cash flow in the comment section of my latest article about Valeant (NYSE:VRX). And this is important because Valeant's free cash flow is an important but often overlooked factor in the bull or bear case for investing in this company. I think free cash flow is one of the biggest positive arguments in terms of Valeant's ability to meet its debt obligations.
The controversy stems from misunderstandings about Valeant's ability to meet its debt obligations with free cash flow. These debt obligations, laid out in a table below, are the maturities of Valeant's bonds as presented in the 2016 10-k before the recent refinancing of the company's debt.
This table is inaccurate now due to a refinancing of the company's debt that was completed in March.
The company used the proceeds of the offering and the new term loan together with cash on hand to repay all term loans under its credit facility maturing in 2018, 2019 and 2020, $350 million of revolver borrowings and $1.1 billion of its 6.75% senior notes due 2018.
This refinance essentially makes Valeant's solvency a non-issue for the time being. But it will; however, come at the expense of greater interest payments in the future. That being said, by kicking the can down the road, Valeant has bought itself time to turn around the company through its new growth drivers like Siliq, Contrave, and the continued success of its top-seller Xifaxin.
Valeant's First Quarter
The first quarter seems to be influenced by industry-wideweakness that was revealed by Johnson & Johnson (NYSE:JNJ) in its first quarter result. But I think this sentiment may actually be exaggerated.
Remember, JNJ was the first major American healthcare company to report after Trump's attempt to repeal Obamacare. Analysts were paying extremely close attention, and may have overreacted to what was actually a small disappointment. Sales actually increased by 0.8%. The good news is that industry weakness has already been priced into the stock price after JNJ's earnings earlier in the month.
Two major negative sentiments have already been priced in. First, the weak guidance from management in the fourth quarter of 2016, which I believe was a 'kitchen sink'. Secondly, the weak JNJ result is also already priced in. This means the expectations going into Q1 are extraordinarily low. All Valeant has to do is not report a disaster, and the stock should retrace some of its earlier losses.
All in all, Valeant has a pretty good chance of beating earnings according to all the available information. On top of this, the debt issue is not as big of a concern as it was during previous earnings results. But with all that being said, investing in Valeant before earnings remains extremely risky. The stock has experienced massive selloffs after practically every result since the Phillidor debacle first broke. With that in mind, the May 9 earnings report is an event I'll be watching from the sidelines.
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.