There is an ongoing battle over Valeant’s (VRX) valuation and business model between short-sellers and investors. This opportunity allows us to improve our analysis skills and understanding of business models. Also, how will Sequoia, an owner of over 20% of Valeant’s equity, handle their portfolio?
My first question is whether Valeant is a franchise with durable competitive advantages or a roll-up of commodity products dressed-up in a fancy industry (Pharma)? We should use this case to learn how experienced analysts present their opposing views.
First: What’s not to like? Valeant has rapid growth with huge profit margins? Of course, the PERFECT investment is a company that has high returns on capital and can constantly redeploy its capital at the same high returns. The classic case would be the early (pre-2000) history of Wal-Mart (WMT) as the high returns generated from its stores could be redeployed into new stores on the borders of their regions which had economies of scale in administration, advertising, and management costs per unit of sales. WMT did not have, for example, advantages in gross margins, but net profit margins. See WMT_50 Year SRC Chart.
Dov Gertzulin's DG Capital has had a rough start to the year. According to a copy of the firm's second-quarter investor update, which highlights the performance figures for its two main strategies, the flagship value strategy and the concentrated strategy, during the first half of 2022, both funds have underperformed their benchmarks this year. The Read More
What would be the source of Valeant’s high returns and competitive advantages?
Sequoia (a well-known value fund with an excellent long-term record) saw strong competitive advantages. See their recent investor transcript: