Shareholders of Bausch + Lomb would probably like to forget the past six months even happened. The stock dropped 42.8% and now trades at $11.19. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Bausch + Lomb, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Bausch + Lomb Not Exciting?
Even with the cheaper entry price, we're swiping left on Bausch + Lomb for now. Here are three reasons why we avoid BLCO and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Bausch + Lomb’s sales grew at a mediocre 5.3% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Bausch + Lomb’s margin dropped by 20.6 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Bausch + Lomb’s free cash flow margin for the trailing 12 months was negative 3.5%.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Bausch + Lomb burned through $168 million of cash over the last year, and its $4.83 billion of debt exceeds the $215 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Bausch + Lomb’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Bausch + Lomb until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Bausch + Lomb isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 14.1× forward P/E (or $11.19 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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