Lately, InvestorPlace writers have been busy pounding the table for the stock of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA).
Teva is based in Israel but became the largest maker of generic drugs through its $40.5 billion purchase of Actavis, formerly the generic drug unit of Allergan plc Ordinary Shares (NYSE:AGN). That deal closed last August.
Based on the most recent earnings report, TEVA stock is very cheap. Revenue was up 33% thanks to Actavis, to $6.5 billion, and it earned $1.38 per share. Analysts had expected just $6.24 billion in revenue and $1.35 per share of profits. For 2017 Teva is predicting non-GAAP earnings of $4.90-$5.30 per share on revenue of $23.8 billion-$24.5 billion.
These numbers make TEVA look as cheap as a bag of potato chips. If Teva hits its targets, that forward price-to-earnings multiple comes in at 7. The market cap of $34.75 billion is just 1.5 times sales.
But there’s more to this story than numbers.
Post-Deal Problems Weigh on TEVA Stock
Since the Actavis deal closed, Teva has faced a host of problems.
It lost patent protection on a multiple sclerosis drug called Copaxone. It had to pay $519 million in December to settle bribery charges. The Department of Justice is investigating it, and other generic drug makers, for price-fixing. Teva must repay $21 billion in debt over the next five years, and $5.3 billion is due next year.
Even if the Trump Administration wanted the antitrust suit to go away, there are now 39 states involved. Zohydro ER, its generic opioid, lost a Delaware suit on two patents and may have to be pulled from the market.
Worse, there is no one on the bridge of this ship to direct the counterattack. Siggi Olafsson, who was running the generics group, stepped down in December. Teva Pharmaceutical CEO Erez Vigodman was forced to step down last month.
Haaretz, the Israeli daily newspaper which follows TEVA closely, as it’s the country’s biggest company by market cap, says the company is in “crisis mode”, with one analyst saying its leadership is being done by short-term lease.
It’s hard to see much planning going on even while the company drifts toward the rocks. So why does our James Brumley insist the company “isn’t doomed”?
Assets Find a Way
The optimism of our analysts is based on the idea that assets will find a way.
Martin notes that TEVA can sell assets, and that its debt situation isn’t so dire that it can’t get a good deal. Enomoto notes that the affordable dividend of 34 cents per share represents a yield of nearly 4%, which means income investors should be grabbing Teva stock with both hands, supporting the current price.
Our Chris Lau has also taken a look at Teva Pharmaceutical and finds their 2017 guidance reasonable, noting that it takes account of the Capaxone loss, that it can optimize its generics business and put money into research, leading to a new virtuous cycle of drug discovery.
For that to happen, however, Teva needs leadership, and so does the generics unit formerly known as Actavis. Until Wall Street is convinced that TEVA has filled the gaps, most analysts are unlikely to recommend the shares, and could pressure chairman and interim CEO Yitzhak Peterburg to sell the whole company.
That, however, could turn out to be the best of all possible news, because the assets are sure to attract a premium over the current valuation.
You may be in for a bumpy ride, in other words, and you may require some patience. But we think Teva stock is a good speculative buy — the kind you may look upon two years from now with real pride.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.