Even during a down period for the markets, Bausch + Lomb has gone against the grain, climbing to $16.01. Its shares have yielded a 10.4% return over the last six months, beating the S&P 500 by 11.7%. This run-up might have investors contemplating their next move.
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We’re glad investors have benefited from the price increase, but we’re swiping left on Bausch + Lomb for now. Here are three reasons we avoid BLCO and a stock we’d rather own.
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Bausch + Lomb’s full-year EPS dropped significantly over the last three years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Bausch + Lomb’s low margin of safety could leave its stock price susceptible to large downswings.
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Bausch + Lomb’s margin dropped by 19.4 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. 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 1.3%.
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’s $5.08 billion of debt exceeds the $397 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $891 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Bausch + Lomb could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
