Description

Description:

BLCO is a global eye care company. Revenues fall into three primary segments: 1) vision care (which is includes contact lenses and consumer eye health products) makes up 61% of revenues (using 2023 nums); (2) Surgical (mainly equipment for cataract surgery and higher-margin consumables as well as implantables) comprise about 18% of revenues (again using 2023 nums); (3) Pharmaceuticals for eye illnesses such as dry eye, eye inflammation, glaucoma, etc. makes up the balance (approximately 20% of 2023 revenues).

A small sliver of the company was spun out of Bausch health (BHC) in May of 2022 at $18. 

Since the IPO the stock is down a bit despite solid revenue growth and improving GMs, due to uncertainty around the timing of BHC’s sale of the remainder of the shares (given the remaining 88% ownership, this is a significant overhang), along with investments BLCO has made in overhead, which has been a headwind on operating and ebitda margins.

Thesis:

We see a near double in BLCO shares over the next two years with minimal downside as significant valuation discount (6-10 turns based on ebitda and eps; see table further below) to peers closes due to the following:

(1) likely upcoming beat & raise cadence;

(2) inflection in operating & ebitda margins from a downward to an upward trajectory as early investments in sales of new products such as Miebo and Xiidra (launched and acquired in 2023, respectively) decelerate, allowing for strong incremental margins (see: https://ir.bausch.com/press-releases/bausch-lomb-completes-acquisition-xiidrar);

(3) BHC liquidates its remaining 88% stake in BLCO;

Given the above catalysts, we see the valuation gap between BLCO and its closest comps closing significantly to an eps multiple of approximately 25x, still approximately 3x turns below that of ALC/COO. (We believe the gap may not close fully due to higher leverage at BLCO, shorter public track record & the mix of business between ophthalmology/surgical/pharma makes a full compare imprecise, offset somewhat by higher EBITDA/eps growth at BLCO).  See Comparable valuation table below:

Were the above to play out as we expect, we see the shares trading at approximately 25x our 2026 eps estimate of $1.16 by approximately the end of 2025, approximately $29/share.

Further to the 3 catalysts:

1. Beat & raise cadence expected.  Over the last 4 quarters, BLCO has met street estimates once and beat estimates three times.  We think that the body language on the 1Q call was such that a near-term uplift to guidance is quite possible, if not likely.  In particular, there was this exchange on the 1Q call:

Unknown Analyst

Okay. So it sounds like there's perhaps some conservatism going from 12% organic growth in Q1 to 8% for the full year.

Sam Eldessouky

Well, as Brent said, Lei, we're very excited about what we're seeing in the Miebo, we're excited about what we're seeing in our base business, just Brent went through how we're seeing the performance across all 4 businesses and the regions. But again, we're just really balanced here in terms of how we think about the rest of the year, given the fact we're still early in the year.

Brent Saunders

Yes. I think stay tuned. Let's see where we are in the second quarter and then we can -- we may adjust. But let's execute first.

2. The first quarter (reported in early May) saw a 130 bp ebitda margin improvement.  This marks a shift versus the 2021-2023 period to accelerating EBITDA margins as BLCO’s overhead investments begin to pay off and the sales cycle matures for several key products.  Moreover, this was realized despite an unusual one-time event related to a cyberattack at Change Healthcare that hampered Xiidra sales in 1Q.  We see the ramp in the company’s margin profile continuing and a factor that leads to a higher market multiple.  See model below:

1. It hard to handicap exactly when the distribution of the remaining BLCO shares will occur, but we are speculating it will be within the next 18ish months.  Here’s why.  We think BHC management is likely looking at two factors overall: a) when can they maximize the per share value of their BLCO shares?  On this score, they are likely looking at a similar margin/ebitda/eps trajectory that we have outlined and don’t think we are quite there yet.  They are hoping/expecting a more appropriate valuation as BLCO continues the 1Q trend of positive improvement in the margin structure of the business; b) secondly, on the back end of the window, is the debt stack and while there are some debt maturities at the BHC level in 2025, these can be largely handled with current liquidity + internally generated operating cash flow of approximately $750m/year and perhaps some refinancing.  However, there is a more significant debt wall in 2027/2028 with over $9B of maturities due.  We think BHC will likely want to get ahead of that no later than early 2026 (when the first $1B tranche of debt out of $9B total that matures in 2027/2028 will become current a year prior to 2/27).  A BHC sale of it's reamaining BLCO stake would yield approx. $5.5b in gross proceeds to BHC at $18/share.  If we are right on his, then some time in the next 2-6 quarters would be the time frame.

Here’s a snapshot of the debt wall:

Risks:

Headline risk related to BHC's financial health.  BHC is highly levered as described above.  Recently there was a rumor of a reorg.  

Catalysts:

Beat & raise cadence

Reversal of margin structure

BHC sale of remaining stake in BLCO

Interest rate decline

Catalyst

Catalysts:

• Beat & raise cadence
• Reversal of margin structure
• BHC sale of remaining stake in BLCO
• Interest rate decline