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ENDP Valens Credit Analysis – Healthy cash flows, sizable expected cash build, and significant runway to improve operations indicate that ratings agencies and credit markets are overstating credit risk
April 11, 2018
Cash bond markets are materially overstating credit risk with a YTW of 12.451% relative to an iCDS of 640bps and an iYTW of 8.981%. Furthermore, S&P is also materially overstating ENDP’s fundamental credit risk, with their high-yield B credit rating five notches lower than Valens’ XO (BBB-) rating
Incentives Dictate Behavior™ analysis highlights that ENDP’s management is not well compensated in a change-in-control, meaning management may not be incentivized to pursue a sale or accept a buyout of the business, limiting event risk
ENDP currently trades at the lower end of recent averages relative to UAFRS-based (Uniform) Earnings, with a 16.1x Uniform P/E. At these valuations, the market is pricing in expectations for Uniform ROA to decline from 23% in 2017 to 12% by 2022, accompanied by 8% Uniform Asset growth going forward. Given that valuations are likely being compressed by the market’s inaccurate perception of the firm’s credit risk, ENDP could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement