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Bausch Health: Long-term need to implement shutdowns for protection

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Introduction

Investors who believe stocks have no memory should digest the stock price performance of Bausch Health Companies Inc. (NYSE: BHC) in the long term chart below. As we can see below, Bausch Health had a very bad 2022 to date, which would likely have been much worse without the stock’s long-term support dating back to 1996. The question now is whether stocks can stay above this crucial support level over the next few sessions, because if they can’t , there is minimal downside support to keep the stock price high. For this to happen, we need to see a reversal of the death cross (bearish crossover of the 10-month moving average below the corresponding 50). This must be a concern for bulls no matter how bullish one may be in this stock.

BHC Long Term Support

BHC Long Term Chart (Stockcharts.com)

There are many reasons to be bullish or bearish in this game. This goes without saying given the many moving parts we have been witnessing in Bausch lately. Will Ryaltris continue to gain ground? Will Xifaxan continue to come under more pressure from cheaper alternatives? The recent tentative approval of a generic Xifaxan by the FDA recently took many people by surprise and with good reason. Bausch has a permanent patent in the United States for this drug which will not expire until 2029.

Given Bausch’s leveraged balance sheet, that’s something the company didn’t need at this point. While stable companies with minimal leverage can withstand volatile changes in their market capitalizations, companies such as Bausch that are highly leveraged must demonstrate their creditworthiness to ensure funding can be secured if needed. In fact, we’ve seen financial engineering lately regarding his debt that essentially buys Bausch more time to get his house in order.

From the perspective of a shareholder or buyer, the appeal here lies in the company’s excellent gross and operating margins (71% and 19% respectively), as well as the value of its non-conforming earnings. to GAAP (forward multiple of 2.24) and its sales (forward multiple of 0.32). GAAP earnings are virtually non-existent due to high interest expense, but Bausch continues to generate free cash flow. But will that be enough to retain more long-term investors? We have doubts for the following reasons.

Short-term spike in interest

Recent activity at Bausch has prompted short sellers to demand blood. The short-term interest rate rose from 6.2% at the end of August to 9.73%. We use the 7% as a marker, which basically makes it very wary of being long stocks above that level. Why? Short sellers are sophisticated investors who take much more risk than their long counterparts. Suffice it to say that when a company’s short interest ratio jumps sharply, it means that short sellers are fully aware of the upside risks, but continue to trade short nonetheless. As we can see below on Bausch’s daily chart, the stock briefly regained its 10-day moving average ($7.32) this week before losing that support level again. It is crucial that the stock regains and stays above this level (which in the process will push the average up) to keep short sellers at bay.

BHC Technical Table

BHC Daily Chart (Stockcharts.com)

Analysts are becoming more bearish

Although, as mentioned, Bausch remains healthy profitable on a non-GAAP basis, earnings revisions have slipped at a knot rate over the past, which is a worrying trend for longs. In fact, if we examine the annual non-GAAP estimates below, we see that the reduction in estimates for fiscal year 2022 is actually accelerating. While the final estimate for FY2022 is down about 23% over the past three months (average monthly decline of 8%), the estimate is down more than 11% in the past 30 days alone. Suffice it to say, no matter how cheap Bausch’s stock may look right now, if the relentless reduction in forward earnings estimates continues for some time, it’s clear that support for the decline will be under pressure again.

Revisions to BHC earnings (non-GAAP)

BHC Earnings Revisions (Annual) (Seeking Alpha)

Conclusion

Given Bausch’s valuation, margin profile and expected return to strong growth next year, the company debtpoor earnings revisions and high short interest rates all bring high risk to this game. We look forward to continued coverage.