VTRS - Viatris Q1: Okay But Not Great

2023-05-08 10:31:29 ET

Summary

• Viatris Inc. reports 5th consecutive quarterly sales decline.
• Q1 saw the company's 2nd highest free cash flow as a stand-alone.
• The Viatris dividend appears safe, but increases may need to wait with sales concerns.
• I recommend waiting at least till $8 to net a higher initial yield from Viatris Inc.

Viatris Inc. ( VTRS ) has just reported its Q1 earnings, as Seeking Alpha has covered here . For those who may not be aware, Viatris was born as a stand-alone company in November 2020 when Pfizer Inc. ( PFE ) spun off its Upjohn unit and immediately joined hands with Mylan. I've long held Pfizer in my portfolio and also held Viatris after the spin-off, but have since liquidated my position in Viatris. I still follow the company's progress, as I tend to like dividend-paying pharmaceutical stocks.

This article evaluates Viatris' Q1 with an eye on the stock's outlook. Let us get into the details.

Good:

• Viatris reported $923 Million in Free Cash Flow ("FCF") in Q1, which is its 2nd highest as a stand-alone company. With a share count of 1.197 billion and a quarterly dividend commitment of 12 cents per share, Viatris needs $143.64 million in FCF to cover its dividends. The fact that this represents just 15% of Q1's FCF should comfort investors about the company's ability to sustain and increase dividends. Obviously, one quarter does not make a summer, but this is a strong start to the year nonetheless, from an FCF perspective.
• Viatris paid down more than half a billion dollars in debt in Q1, and this continues the company's trend of aggressively paying off its debt as shown below. Since the spinoff at the end of 2020, the company has reduced its debt load by 25%, as shown below.

• Viatris reported it spent ~ $400 million on shareholder dividends and share repurchases. I established above that the company pays about $143 million per quarter on dividends. That means, the company likely spent nearly $250 million on buybacks, which sounds great. As shown below, Viatris' shares outstanding has been constant since the spin-off. Assuming the worst that the company spent the entire $250 million buying at YTD highs around $12, that's still enough money to have retired roughly 21 million shares if the entire $250 million was actually spent on buybacks.

• Viatris reaffirmed its 2023 guidance, with new product revenue being projected at $500 million for the year. At a market cap of $11 billion, Viatris' stock is trading at a price-sales multiple of 0.70, which may seem attractive to value investors.

Bad and Ugly:

I am grouping the Bad and Ugly sections because what may seem Ugly on the balance sheet may not actually be that bad when you see that you are dealing with a Pharmaceutical company with its natural ebbs and flows.

• Net sales were down by a notable percentage whether you look at reported change or operational or adjusted for divestiture. The fact that every market - Developed, Emerging, China, and Japan-Australia-New Zealand ("JANZ") - showed a decline in the reported revenue should be highlighted. This happens for the 5th straight quarter with declining sales, as Seeking Alpha has reported here .

• While sales consistently went down, operating expenses went up nearly 8% YoY. Obviously, R&D expenses ebb and flow with pharmaceutical companies, so this should be too much of a concern. But investors need to keep an eye on the general administrative expenses category shown below, which went up 5%.

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