Investing Club: We're looking past Bausch's mixed quarter to the greater value a breakup brings

Published Wed, Feb 23 20221:10 PM ESTUpdated Wed, Feb 23 20221:12 PM EST

Club holding Bausch Health Companies (BHC) reported mixed fiscal fourth-quarter results Wednesday morning. Revenue of $2.196 billion (+3% YoY organic) missed expectations of $2.205 billion while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $909 million outpaced the $898 million the Street was looking for. Adjusted earnings per share of $1.27 per share also beat estimates ($1.15 consensus). Additionally, despite being negatively impacted by legal settlements and separation related payments, operating cash flow of $24 million was much better than the $558 million outflow the street was expecting. Bottom line While this was not the release we were hoping for as the results were mixed and guidance disappointed, we believe the breakup of the company — two units are set for initial public offerings (IPOs) — remains the key to unlocking value and realizing upside as EBITDA associated with roughly 48% of revenue are hostage to Bausch Pharma's reduced enterprise value (EV) to EBITDA multiple. Given that, we continue to find shares attractive at current levels as indicated by our buy earlier Wednesday . Guidance Looking ahead, management guided for full year 2022 revenue in the range of $8.4 billion to $8.6 billion, short versus the $8.795 billion the Street was looking for coming into the print. Additionally, full year adjusted EBITDA is expected be in the range of $3.45 billion to $3.6 billion, also short versus the $3.657 billion the Street was looking for. By business, the team expects organic revenues to grow 2% to 3% in Bausch Pharma, 4% to 5% in Bausch + Lomb, and 15% to 18% at Solta Medical. While the revenue is disappointing, we are not deterred as the thesis here is a value unlock via the IPOs of Bausch + Lomb and Solta Medical. As a reminder, these offerings are expected to unlock value by freeing up these two segments to trade at multiples more in line with their pure play peers. As a result, while the overall EBITDA guide may be disappointing, it's the EV-to-EBITDA multiple that is ultimately placed on the standalone companies that will ultimately be the source of upside. As a reminder, Solta's peers InMode and Beauty Health Company trade at EV-to-EBITDA multiples of roughly two to three times that of Bausch Pharma's current roughly 8x, while Bausch + Lomb's peer Alcon trades at a roughly 20x EV-to-EBITDA multiple. Put another way, we believe that these IPOs will allow EBITDA attributable to roughly 48% of the entire company's sales — 44% from Bausch + Lomb and another 4% from Solta — to trade at multiples roughly two or three times the levels they're saddled with as being one big company including the Bausch Pharma unit. On the post-earnings call, CEO Joe Papa reiterated that with the registration statements for both IPOs now publicly filed, the planning for the separation is now "substantially complete." He added that the team is "prepared to move forward, subject to market conditions and other approvals and factors." Management believes they will be able to move forward with both IPOs by the middle-to-end of March. However, the added, "We've got to make sure the markets are correct. We wanted to do this with urgency to be clear, but we also want to make sure we maximize the value for our shareholders." The team may be ready to go in March. But in the interest of maximizing shareholder value, a bad tape could delay the process as the management rightly does not seem interested in launching the IPOs into a down market with contracted valuations. Segment Results While the reporting structure currently reflects the combined company, starting in the first quarter of 2022 (the next earnings release), management will report results in three segments reflecting the three new businesses: Bausch Pharma, Bausch + Lomb, and Solta Medical. Breaking down the Q4 top line, the Bausch + Lomb segment generated sales of 1.001 billion (+7% YoY organic), better than expectations of $995 million while Bausch Pharma (which currently houses Solta results) reported sales of $1.195 billion (flat YoY organic). The Q4 breakdown for Bausch + Lomb was as follows: Vision Care: $227 million vs. 234 million expected Surgical: $198 million vs. $191 million expected Consumer: $399 million vs. $392 million expected Ophtho Rx: $177 million vs. $178 million expected The Q4 breakdown for Bausch Pharma was as follows: Salix: $559 million vs. $545 million expected International Rx: $276 million vs. $275 million expected Ortho Dermatologics: $146 million vs. $161 million expected Diversified Products: $214 million vs. $230 million expected Global Solta, where 74% of sales are consumables (think recurring sales), is currently housed in the Orth Dermatologic segment and reported Q4 revenue of $89 million, a hair short versus expectations of $90 million. On the call, management commented, "The Solta business had a very strong 2021 compared to last year, ending the year with a 22% reported revenue growth driven by 26% consumable organic growth for the year." Given the impact of Covid, the team added that versus a more normalized 2019, fourth quarter 2021 revenue was up 39%, and Q4 was up 20% sequentially versus fiscal third quarter. From 2018 to 2021, Solta Medical has realized a compounded annual sales growth rate (CAGR) of 32%. Also in Orth Dermatologic, Q4 Dermatology sales of $$57 million missed expectations of $78 million. In Diversified Pharmaceuticals, Neuro & Other Q4 sales of $145 million missed expectations of $160 million. Generics sales of $44 million were in line with expectations. Dentistry sales of $25 million were just short versus expectations of $26 million. (Jim Cramer's Charitable Trust is long BHC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Joseph Papa, CEO, Bausch Health

Scott Mlyn | CNBC

Club holding Bausch Health Companies (BHC) reported mixed fiscal fourth-quarter results Wednesday morning.