One of Wall Street's biggest winners of the day is Bausch + Lomb, a ophthalmic goods company whose shares have climbed 6.5% to a price of $20.75 -- 24.65% below its average analyst target price of $27.53.
The average analyst rating for the stock is buy. BLCO may have outstripped the S&P 500 index by 6.0% so far today, but it has lagged behind the index by 17.2% over the last year, returning 15.8%.
Bausch + Lomb Corporation operates as an eye health company in the United States, Puerto Rico, China, France, Japan, Germany, the United Kingdom, Canada, Russia, Spain, Italy, Mexico, Poland, South Korea, and internationally. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Bausch + Lomb does not release its trailing 12 month P/E ratio since its earnings per share of $-1.29 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for BLCO of -16.1. Based on the company's positive earnings guidance of $1.18, the stock has a forward P/E ratio of 17.6.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the health care sector has an average P/E ratio of 26.07, and the average for the S&P 500 is 29.3.
BLCO’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Bausch + Lomb, we obtain a PEG ratio of 15.14, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
Bausch + Lomb's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -17,000 | 181,000 | -198,000 | -216.47 |
| 2022 | 345,000 | 175,000 | 170,000 | -75.0 |
| 2021 | 873,000 | 193,000 | 680,000 | 152.79 |
| 2020 | 522,000 | 253,000 | 269,000 |
- Average free cash flow: $230.25 Million
- Average free cash flown growth rate: -39.0 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for BLCO, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Bausch + Lomb has a P/B ratio of 1.12. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the third quarter of 2024.
With a negative P/E ratio., a lower P/B ratio than its sector average, and positive cash flows with a downwards trend, we can conclude that Bausch + Lomb is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and no PEG ratio.
