Over the past six months, Bausch + Lomb’s stock price fell to $15.99. Shareholders have lost 7% of their capital, which is disappointing considering the S&P 500 has climbed by 7.7%. This may have investors wondering how to approach the situation.
Is now the time to buy Bausch + Lomb, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Bausch + Lomb Not Exciting?
Even with the cheaper entry price, we’re cautious about Bausch + Lomb. Here are three reasons you should be careful with BLCO, plus one stock we’d rather own.
1. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Bausch + Lomb’s full-year EPS dropped 96.8%, or 25.3% annually, 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.
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 13.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Bausch + Lomb’s free cash flow margin for the trailing 12 months was breakeven.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Bausch + Lomb historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.4%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
Bausch + Lomb isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 18.3× forward P/E (or $15.99 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 pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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