Interested in a world-class pharmaceutical stock? Interested in one trading at a cheap enough valuation that it not only provides room for big upside, but also happens to be at the lower end of its historical P/E range? What if I told you this company’s business was consistent, still growing vastly in excess of other, similar companies, and its financial stability was beyond question?
I know what I’d say. “Tell me more.” Okay, here’s more.
Teva Pharmaceutical Industries (NASDAQ:TEVA) is a gigantic player in the generic pharmaceutical business. When drugs go off-patent, Teva steps in and starts selling generic versions — a lot of them. At last count, I saw 1,450 drugs available in 60 countries, across all kinds of delivery mechanisms (pills, inhalants, etc.).
On top of that, Teva has two drugs that it developed itself. Copaxone treats multiple sclerosis and Azilect treats Parkinson’s. The company makes so much money that it is able to buy other companies that are accretive to its business. In May, the company scooped up Cephalon, adding drugs that treat pain and are used in cancer patients. The business is so well organized and managed that it is able to bundle products together to offer to hospitals and institutions, and also act as a de facto department store for generics.
The company’s growth continues unabated. Revenue is expected to rise 14.9% this year to $18.5 billion, and 12.1% the following year. Earnings are expected to grow 12% this year and another 11% next year, with five-year annualized projected growth of 9%. Its net margins are a strikingly high 18.6%. The company carries $4.1 billion in cheap debt and holds more than a billion dollars in cash. Meanwhile, the all-important annual free cash flow (FCF) numbers just keep getting better and better. In 2008, Teva managed $2.55 billion in FCF. It crept up to $2.65 billion in 2009, then exploded to $3.4 billion last year.
So just how cheap is Teva, now that we have a few numbers in hand? The stock trades at only 7.5 times this year’s earnings, and seven times next year’s estimates. Normally, the stock trades at a P/E of between 15 and 24. Since 2001, it never got lower than 13.2. I couldn’t find a time when it has been this cheap on a P/E basis. Even better, on virtually every other valuation metric, it also is at multiyear lows: price to book, price to sales and price to cash flow.
Teva is a buy at these levels and, I would add, on any further declines.
Lawrence Meyers is long Teva.