There’s little doubt 2016 was a downer for Teva Pharmaceuticals Industries Ltd (ADR) (NYSE:TEVA) shareholders. Nevertheless, there’s reason to believe 2017 could be time to forgive and forget — or at least give TEVA stock some benefit of the doubt. Let me explain.
It’s no secret, there’s been a lot factors weighing on TEVA stock over the past year. For one, new debt tied to its acquisition of Allergan plc Ordinary Shares’ (NYSE:AGN) generic business for a hefty $40.5 billion has been one thorn with some investors.
For many other shareholders, though, a price-fixing scandal, tied-at-the-hip resignation of its CEO and restructuring of management has been a definite drag on shares of TEVA. And if that weren’t enough to pressure TEVA stock, investors have also been bracing for the imminent loss of patent protection for Teva’s key non-generic multiple sclerosis drug, Copaxone.
The good news at this point is there’s been a lot of bad news and it’s likely much of the collateral damage has been priced in with shares off around 45% over the last year. Even better, Teva Pharmaceuticals should be in position to ultimately right itself.
For all the problems Teva Pharmaceuticals has faced, it needs to be remembered that Teva is also the world’s largest generics company. And in a business demanding of scale and industry expertise to succeed, Teva Pharmaceuticals maintains that critical advantage.
The biggest also just got bigger. In acquiring the Actavis generic unit from Allergan, TEVA stock saw its Q4 sales jump by 33% to $6.5 billion. As well and despite the additional debt from the deal, Teva Pharmaceutical did manage to bring in $4.3 billion in free cash flow this past year.
Not only is TEVA stock in position to support a healthy 3.8% dividend, but as a well-funded payout, there’s room for increases, too. Shares also trade at a low eight times trailing free cash flow and management expects it can cut operating expenses by roughly $1.4 billion over the next couple years.
Bottom line, I’d guess Teva Pharmaceuticals would gladly take a mulligan regarding its price-fixing scandal if it could. More importantly, with a recent $1 billion settlement with authorities, changes happening in the C-suite and value rearing its head off and on the TEVA price chart; it could be time to forgive and forget.
TEVA Stock Monthly Chart
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Since hitting an all-time-high less than two years ago, TEVA is off a bit more than 50%. The hard correction also sets itself up as a two-step or mirror move with leg AB matching leg CD as shown on the price chart.
TEVA is also showing some value as the current price is wedged between the 50% to 62% retracement levels dating back to a cycle low in 1998, while marginally breaching key pivot lows in 2008 and 2011.
A potential monthly doji “decision” candle that’s taking shape as we enter the last days of February is another sign a bottom could be forming.
Yet, weaker price and stochastic behavior on the daily and weekly time-frames (not shown) has this strategist modestly cautious on buying TEVA stock right now.
TEVA Stock Credit Put Spread
Given what’s been presented and after reviewing TEVA’s stock options, the 17 March $34/$32.50 credit put spread is attractive and better than simply forgiving and forgetting about a stock position.
With shares at $35.38 the out-of-the-money vertical is priced for a credit of 34 cents within the quoted market. If TEVA stock is above $34 at expiration the sold premium amounts to a return of 29% for a less-than-one-month holding period.
The return represents the equivalent of taking in the quarterly dividend of 34 cents in TEVA, which incidentally is going ex-dividend Tuesday. The better news, rather than owning TEVA stock outright, is the vertical spread allows for a decline or margin of safety of nearly 5% before the strategy is doing worse than breaking even at $33.66.
The vertical also has the advantage of limiting the investor’s risk to $1.16, regardless of how low TEVA might go during the life of the spread. And if shares do move aggressively lower, stock can always be acquired through assignment or closing the spread and purchasing shares.
Using this type strategy, the most an investor would pay for TEVA is $33.66. It also ensures an effective purchase price is never more than $1.16 above the current price of TEVA stock during the life of the spread.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
