Valeant Pharmaceuticals shares hit a ceiling today and reversed course after Tuesday’s strong gains on the back of the company’s announcement about considering strategic options and its earnings report. Analysts were encouraged by the results, but they cautioned against becoming too optimistic too quickly, with more than one firm warning that guidance is at risk. It seems as if their analysis of the results gave investors pause today, and one firm suggested that part of the extreme reaction witnessed on Tuesday came courtesy of a short squeeze.

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Valeant misses estimates but has better news

Valeant reported second quarter earnings of $1.40 per share, which missed the consensus by about 7 cents. Revenue also came up a bit short at $2.42 billion, compared to the consensus of $2.46 billion. Investors found plenty to like, however, as the results indicated signs of stabilization and management announced that they’re looking into divesting non-core assets.

JPMorgan analyst Chris Schott especially likes Valeant’s potential asset divestures, although the drug maker didn’t disclose any specifics about which businesses they’re considering divesting. However, He noted that Valeant considers its core businesses to be dermatology, eyecare, GI and consumer, with the U.S. and Canada as being its core geographic regions.

Is Valeant’s “apocalypse” fading?

Canaccord Genuity analyst Neil Maruoka, who raised his target price from $28 to $31 per share but kept his Hold rating, said he sees signs that Valeant Pharmaceuticals’ “apocalypse” is fading. He believes management is making progress in their turnaround efforts, and he also highlighted the roughly $8 billion in assets the company is looking into divesting. Additionally, he noted that it plans to pay down approximately $5 billion in debt over the next year and a half through free cash flow generation and sales of those non-core assets.

However, he still believes CEO Joseph Papa must keep building credibility throughout this early part of his tenure, and he notes that investor confidence will only return if he is able to execute and deliver on the targets he has set.

Analysts see risk to Valeant’s guidance

BMO Capital Markets analyst Gary Nachman said it was a relief that Valeant reiterated its full-year guidance for earnings of $6.60 to $7 per share, EBITDA of $4.8 billion to $4.95 billion, and revenue of $9.9 billion to $10.1 billion. He believes investors had been expected a reduction in that outlook. He increased his price target from $26 to $29 per share and maintained his Market Perform rating.

Maruoka believes Papa will be able to deliver on his guidance, but Schott cautioned investors that he sees downside risk to Valeant’s full-year guidance for this year. He noted that the earnings from the first half of the year only represented 40% of that full-year guide, and he second half of the year reflects a recovery in the businesses and lower expenses. He noted that if Valeant’s businesses don’t recover as management expects them to, there is downside risk to their guidance.

Short squeeze?

Susquehanna analyst Andrew Finkelstein also warned that Valeant might not be able to meet its guidance because it will require a steep ramp throughout the rest of the year. He believes a short squeeze might have exaggerated the 25% rally in the drug maker’s shares, but he adds that it will take a much bigger improvement in order for it to “emerge from the shadow of debt.” Recall that Jim Chanos said earlier this year that he’s been short on the drug maker for some time. Although Finkelstein was encouraged by the second quarter results, he still sees weakness in some key areas such as cash flow and average selling prices. He continues to rate Valeant at Neutral with a $33 price target.

Shares of Valeant retreated by more than 3% to fall as low as $27.28 during regular trading hours on Wednesday.

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