Bausch Health's earnings report was so bad we had to create a new rating for the stock

Published Tue, May 10 20221:56 PM EDT

Bausch Health Cos. (BHC) reported abysmal first-quarter results before the opening bell Tuesday. Revenue of $1.92 billion, flat year over year on an organic basis, missed expectations of $2.03 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped 14% from the same period a year ago to $732 million, missing the $810 million consensus. Operating cash outflow of $63 million was much better than the $1.04 billion outflow the Street was expecting. Lower full-year guidance on adjusted EBITDA and revenue — along with the weak quarter — sent shares of BHC down roughly 25%. Bottom line CEO Joe Papa came on "Mad Money" in March and pledged he would breakup the company in a way that maximizes shareholder value. Unfortunately, the opposite happened. Jim Cramer expressed his dissatisfaction with the way Papa handled things during the Club's "Morning Meeting" on Tuesday . Papa priced the Bausch + Lomb initial public offering (IPO) on one of the worst days imaginable and erased value in the process. Shares of the eye-care business were priced last week at $18 each, below the expected range. While the stock closed at $20 on its debut Friday, it dropped to $18 on Monday and then took another leg down Tuesday. Even though he only put 10% of Bausch + Lomb in the IPO, Papa inflicted too much damage. While he told CNBC in March that business was going well, Papa missed on nearly every single line item on Tuesday's earnings release. Sure, the company is feeling the effects of a strong dollar and Covid lockdowns in China, but so is everyone else. Papa's execution could not have been worse. Given these poor results and our loss of faith in management's ability to unlock further value via spinoffs following the completely botched Bausch + Lomb separation, we're downgrading shares to a 4 rating, an unofficial rank we have not had a use for until now. We usually rate stocks 1 to 3 . The unofficial 4 rating is really a place holder to indicate a suspension of our rating on BHC, pending new information. But in the absence of anything more forthcoming, we'll look to sell into strength. Our price target is now also under review. Guidance In addition to the disappointing results, management reduced guidance for full-year 2022 revenue, now expecting sales of $8.25 billion to $8.4 billion, down from $8.4 billion to $8.6 billion. Management said this is due to an updated view on foreign exchange as well as Covid and inflation headwinds that were only partially offset by an improved outlook for base performance. The sales forecast was also short versus expectations of $8.56 billion. Full-year adjusted EBITDA also took a haircut on the aforementioned headwinds, as well as reduced base performance expectations, and adverse effects from separations. The company now expects a range of $3.23 billion to $3.38 billion, also short versus the $3.49 billion expected by the Street. Next steps On the post-earnings call, Bausch Health management pointed out that the company has the option to monetize an additional 10% of its 90% ownership of Bausch + Lomb. The proceeds from this option, like they did after last week's IPO, would be used to reduce debt on BHC balance sheet. Should that occur — and following the expiration of agreed-upon lockups and the achievement of their target net leverage ratio of 6.5 times to 6.7 times — management intends to distribute the remaining 80% of Bausch + Lomb to BHC investors, subject to shareholder approval. Management at Bausch Health said it plans to wait for better market conditions to bring its medical aesthetics business Solta Medical public. After Solta becomes its own stock, the remaining part of BHC will consist of its pharmaceutical business, with major ownership in the spin-offs. Segment results Breaking down the first-quarter's top line, the Bausch + Lomb segment generated sales of $889 million, missing expectations of $916 million. In the Bausch Pharma unit, Salix sales of $464 million missed expectations of $509 million. International sales of $244 million missed the $268 million consensus. Diversified Products sales came in at $249 million. Due to a change in the diversified products segment structure, we do not have a direct apples-to-apples comparison. Backing into it, however, the result looks short versus an implied consensus of $258 million. Solta Medical, where 81% of sales are consumables, sales of $72 million came up short versus the $80 million Street consensus. (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. 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Joseph Papa, CEO, Bausch Health

Scott Mlyn | CNBC