Valeant Pharmaceuticals’ (TSX:VRX) upcoming Q2 may be the first of a number of quarters that show that the company’s acquisition-focused growth strategy is strong and sustainable, says Paradigm Capital analyst Alan Ridgeway.
On Thursday, Valeant will report its Q2, 2014 results. The company is following up on a Q1 in which it posted a topline of $1.9 billion; an increase of 77% over last year’s second quarter.
Valeant is currently embroiled in a testy takeover battle with Botox-maker Allergan, and Ridgeway thinks this will be an important quarter for those investors evaluating which management team has more credibility. Allergan management contends that Valeant’s business model is flawed and can’t produce sustainable organic growth, but Ridgeway thinks that assessment is wrong-headed. He believes that Valeant is an “acquisition-focused material growth opportunity” that benefits from a diverse portfolio and enjoys a favourable tax structure.
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Ridgeway expects that Valeant will respond to Allergan’s doubts by providing more detail about its intentions. He expects that management will disclose more about its expectations for organic growth and provide pricing and volume expectations for the top 10-15 products. He expects the company will post EPS of $1.97 per share on revenue of $2.074-billion in Q2, ahead of the street consensus of $1.91 on a topline of $2.043-billion.
In a research update to clients yesterday, Ridgeway maintained his “Buy” rating and $175.00 one-year target price, implying a return of 42% at the time of publication. The analyst says that at current trading multiples, he believes the potential acquisition of Allergan is a “free option” for investors.