Day: November 20, 2015

Once lauded as an unstoppable growth machine, Valeant Pharmaceuticals has been mired in controversy and has seen its stock plunge over 70% over the last three months.  Needless to say, Valeant is struggling to gain traction from its precipitous slide.

To provide some brief context, Valeant’s mass sell-off was triggered by a report released by short-seller Andrew Left. The report alleged that Valeant was complicit in an Enron-like accounting scandal in which they were reporting “phantom revenue” trough a specialty pharmacy. The overarching claim was that Valeant’s reported revenue was not in fact in line with actual earnings. With the ghosts of the past still vividly in the minds of investors, many were quick to exit the uncertain situation—irrespective of the validity of Left’s report.

This story interests me because it underscores the true nature of volatile markets, but at the same time illustrates how volatility can yield viable investment opportunities.

As Professor Stone alluded to in class, stocks have both a tangible market value, and a perceived intrinsic value. The latter is relative to individual discernment. Analysts and investors often diverge on opinion when it comes to intrinsic stock value. And to be frank, although well-built financial models incorporating hosts of financial ratios are helpful, in my opinion, intrinsic value cannot be definitely measured. For instance, would an analyst creating a DCF outlook for Valeant in July 2015 been able to predict the landslide that would occur over the upcoming months—no. Conversely, although Valeant’s stock has been battered, does that take away from its strong cash flows, expansive geographic reach, and profitable subsidiaries? No. With that said, couldn’t it be argued that Valeant’s current price undervalues the business?

As a first year business student I am understandably an amateur when it comes to market speak, and my intention isn’t to call out seasoned investors. The point I am trying to reach is that market sentiment is not always based on hard facts. With the horror stories of the past still looming, investors often have an autopilot response to concerning market reports. In my opinion, this potentially yields an opportunity to capitalize on undervalued stock, and perhaps even realize strong returns in the long-term.

I posted a comment to Wall Street Journal blog on this article. (If my comment has not shown up, please allow for a few days, the administer probably has not approved it for display as of yet.)

Further information was sourced from this article.

Apple this, Apple that. What started as a small personal computer company has now transformed into a tech industry juggernaut.

Irrespective of what your opinion may be regarding Apple’s products, there is no doubting Apple’s remarkable ability to grow.

Hailey Cole’s (section 105) blog discusses Apple’s foray into the online music streaming space. She explains how market is crowded, and how players from Spotfiy to Pandora have experienced differing levels of success. In her blog, Hailey also highlights the strength of Apple’s vast user base as it enters a new domain. I tend to agree with her.

What’s important to note is that the online music space is fairly novel. The determining factor of success is clearly the end-user experience.   Players are not only grappling to gain market share, but also touting usability as a means to retain users.

Multiple times throughout COMM101 we have explored the notion of defining a target demographic, a core customer segment if you will. Although this is integral in the effective design and marketing of a product, I feel Apple’s succcess is partially related to its ability to blur the lines between groups of users. They’re able capture the unconventional user—that same user that would have never considered upgrading to a Motorolla flip phone, let alone a ‘smartphone.’

My family would be a prime example. The idea of my parents owning smartphones was once a distant thought. But now, my household boasts 4 iPhones, 2 Ipads, a set of Macbooks, and an Apple TV. Why? Apple makes things simple. They alleviate the daunting task of embracing new technology by removing layers of complexity and designing a user-interface that can appease not only the technology enthusiast, but also a consumer who is first learning to text. In doing so, Apple is able to capture scores of users, and more importantly, foster brand loyalty.

The difference between Apple and the handful of other players in the online music streaming space is their ability to enter this market with a preexisting base of loyal customers—customers who are confident that Apple will be able to deliver the same simplified user-experience regardless of the domain. Those who are skeptical of streaming music as whole, may give the product a try, solely because ‘Apple’ is delivering the experience. As a result, the potential for quick ramp-up and lofty revenues is highly probable in any of Apple ventures.

Hey you never know, one day they may start making cars. Oh wait…I think they might have already started…or something.

Apple this, Apple that.

On scale alone, the colossal merger of beer giants Anhesuer-Busch (AB) and SABmiller warrants some appreciation. The $100 billion dollar transaction creates an unprecedented powerhouse in the global brewing market, one in which trumps its nearest competitor from a market share perspective by three fold.

Large-scale M&A deals have always fascinated me. The financials alone are staggering, but what’s even more interesting is the notion of such giant firms attempting to conflate their cultures. This said, although there are some aspects of the SABmiller acquisition that leave me puzzled, others seem fairly concrete, and point to larger trend in the M&A world; that is, businesses and financing agents alike are increasingly interested in pursuing large scale M&A — the very same M&A transactions that waned during the height of the financial crisis.

To provide context to this post, I want to point out a few very interesting facts that I noticed were imperative to the success of the SABmiller bid.

AB is backing its $100 billion bid through a $75 bridge loan, the largest loan of its type ever to be lent on global markets. Putting aside the the legal complexities, it’s important to note that underpinning such loans is the lender’s confidence in the debtor’s solvency. Solvency is not only related to the current state of business, but also in the strength of future cash flows. In essence, analysts at the lending banks must be confident in both AB’s strategy and in the future environment of the industry they operate in. The point I’m trying to reach is that ultimately, regardless of which way you look at it, the world of finance seems to boil down to the fundamentals of Present Value. In this case, even though AB’s capital structure points to a long term Net Debt to EBIDTA ratio of 2.0 (not necessarily worry-free) their strong credit rating coupled with confidence from lenders has secured the loan that makes this entire transaction possible.

On separate note, another aspect of the merger I found particularly interesting was a point raised by Jonny Forsynth, an analyst who examines the global drink industry. He states that ‘amidst the emergence of a Goliath-like megabrewers — smaller, more agile, craft brewers still do pose a significant threat.’

As we’ve discussed in COMM101 repeatedly, any successful business must have a strong value proposition. And at the root of strengthening any value proposition is: innovation.  I feel that if AB solely banks on its size, and tempers its innovative pursuits, the resulting complacency can have dire consequences.

Information was sourced from this article.