Bill Ackman Eyes Valeant

05/25/2015 7:00 am EST


In a recent speech at the 20th annual Sohn Investment Conference, Bill Ackman caught my attention when he discussed a Canadian pharmaceutical company that he considered greatly undervalued, explains Jay Taylor in Daily Profit.

Ackman was talking about Valeant Pharmaceuticals International (VRX), which he called an early-stage Berkshire Hathaway (BRK.B), referring to Warren Buffett's holding company.

Ackman noted that Valeant Pharmaceuticals isn't simply a pharmaceutical company. Instead, he called it a "platform company," which is "incredibly talented at getting deals done."

Ackman's first major interaction with Valeant took place last year when he teamed up with the company in a failed attempt at a hostile takeover of Allergan (AGN), best known for manufacturing Botox. The attempt was ultimately unsuccessful, though Ackman was able to sell his shares of Allergan at a huge gain.

Ackman notes that the market tends to value companies based on the assets it already owns, resulting in the market undervaluing companies like Valeant and Berkshire Hathaway that have the "ability to make transformative transactions."

Ackman notes three important facts about Valeant's effectiveness. First, that Valeant has achieved greater than 20% return on the $20 billion it has invested in acquisitions since 2008.

Second, that Valeant's management has accelerated revenue growth at all seven of the company's major acquisition companies. Finally, Ackman notes that the company is very effective and efficient at achieving the acquisition synergies it forecasts.

He specifically referenced the company's 2013 acquisition of eye care company Bausch & Lomb, a deal that valued the brand at $8.7 billion. With Valeant overseeing organic growth between 5% and 11%—and more than doubling margins—the brand is now worth more than $21 billion.

Don't be scared by Valeant's valuation. While its 12-month trailing price-earnings ratio is a hefty 81.7, the stock trades at only 19.6 times 2015 forward earnings estimates, an indicator of rapid growth potential.

The next Berkshire Hathaway, according to Ackman, is worth more than $330 per share. That's more than 50% higher than where it currently trades.

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