Beaten-down pharma specialist Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), which has seen its value plummet some 45% over the past year, remains an intriguing option for risk-tolerant investors who looking for potential bounce-back candidate.
TEVA stock closed Tuesday at $28.76, down roughly 20% year-to-date, with a 15% rout having occurred over the past three months. Now at decade lows, Teva trails not only the 7% rise in the S&P 500 Index, but has also grossly underperformed the 8% rise in the VanEck Vectors Pharmaceutical ETF (NASDAQ:PPH).
Despite the recent punishment, TEVA can still deliver can deliver almost 35% returns in the next 12 to 18 months, reaching $40 per share.
Why TEVA Stock Has Fallen
Headquartered in Israel, Teva Pharmaceuticals specializes in branded and generic drug development. The company has fallen out of favor with Wall Street largely in part to the rash of controversies surrounding Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Aside from political pressures related to drug pricing, TEVA is also looking to replace its CEO and CFO.
Obviously, the departure of top leadership is nothing to overlook. Israeli financial news website Calcalist recently reported that the company has narrowed its CEO pool and odds are that the frontrunner candidate will be someone foreign, according to Teva Chair Dr. Sol Barer:
“We are looking for a world-class individual with deep and broad pharmaceutical experience, an individual with experience dealing with global and complex companies, with a strong sense of corporate responsibility and proven strategic and operational capabilities.”
Aside from the uncertainties with top leadership, the company’s balance sheet implies high risk. With almost $35 billion in debt and less than $1 billion in cash, TEVA needs to find ways to boost revenue, cash flow and profits to sustain the business.
Reason to Like TEVA Stock
TEVA understands its situation and has begun to take the necessary steps to improve its outlook, including selling off assets to grow cash. The company, which has trimmed its headcount by about 5,000 people following the closing of the Actavis deal last August, is looking to cut about $1.5 billion in capital expenses this fiscal year.
These maneuvers are aimed at meeting the company’s stated objective to cut $5 billion from its total debt this year. And assuming that TEVA finds a buyer for its oncology and pain business, which according to estimates could fetch for over $1 billion, TEVA could turn a dire situation into meaningful cash flow.
What’s more, with first-quarter revenue growing 17% year-over-year to to $5.6 billion, lead by a 24% surge in generics revenue, climbing from $2.46 billion last year to $3.05 billion, Teva the company continues to operate much better than TEVA stock. And with some patience, the market will reconcile the disparity.
With TEVA stock down to 52-week lows and priced at just six times fiscal 2018 estimates of $4.74 per share, there’s an intriguing risk-versus-reward opportunity here. And with the stock still trading some 21% below its average analyst price target of $38, TEVA offers good value, especially when combined with its 4.8% annual dividend yield.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
