Battered Teva Pharmaceutical Industries Ltd (ADR) Stock Still Is Toxic

Advertisement

TEVA stock - Battered Teva Pharmaceutical Industries Ltd (ADR) Stock Still Is Toxic

Source: Open Grid Scheduler (Modified)

All is not well for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Shares are down more than 50% in August alone, but its problems have been festering for far longer, and TEVA stock is trading at about a quarter of what it was worth in August of 2015.

Battered Teva Pharmaceutical Industries Ltd (ADR) Stock Still Is Toxic

What’s going on … and is the blood in the streets worth buying?

The company embarked on a massive deal last year with Allergan plc Ordinary Shares (NYSE:AGN). Teva bought Allergan’s generic drug business for $40.5 billion, which put severe pressure on its balance sheet.

One year ago, Teva had nearly $7 billion in cash and just $10.9 billion in debt. Fast forward to today, and the company has just about $600 million in cash and more than $35 billion in debt. In April, management acknowledged that it needed to do something about its ballooning debt. New reports on Aug. 22 said dumping its women’s health unit could fetch $2 billion.

It’s a start, but that’s all it is.

Making Matters Worse

Teva’s debt situation is bad, but shares don’t collapse by half in a month over some sudden realization that the company’s IOUs have skyrocketed. The debt has been a mounting problem — quarterly results were a snap disaster.

The company’s $1.02 per share missed estimates, as did revenues of $5.686 billion. Cash flows dried up. Management cut guidance, too.

Using midpoints of Teva’s guidance, the company is now expecting $23 billion in sales, down 5% from previous expectations of $24.15 billion. Earnings forecasts of $4.40 per share are off 5% from earlier estimates of $5.10 per share. Cash flow from operations should come in near $4.5 billion, a nearly 25% decline from the prior guidance of $5.9 billion.

Teva also slashed investors’ safety net, cutting its quarterly dividend by 75% to 8.5 cents per share. But the drop has been so stark and so quick, that the stock is already back to yielding more than 7%.

The fundamentals aren’t pretty. Cash is tight and obligations are many. The top and bottom lines are both under pressure. The biggest problem really boils down to wiggle room — there isn’t any, and there’s too little margin for error. Cutting the payout helps Teva conserve cash, but it also has scared many investors away for good. Selling assets will pressure revenues, too.

The goals are improving margins, which should boost cash flow, and lowering debt. If that can happen, Teva can focus on paying out a more substantial dividend again and reducing overhead.

But that’s a long way out.

Is TEVA Stock Overreacting

Teva Pharmaceutical hasn’t just crashed — it has crashed on high volume, implying institutional investors were part of the exodus. Who can blame them? The situation feels like Valeant Pharmaceuticals Intl Inc (NYSE:VRX). There’s no growth, no stability, no flexibility.

TEVA stock chart
Click to Enlarge 
A 50% move in a month feels overdone, in a way. TEVA stock trades at just 4.2 times forward earnings estimates, and 0.5 times book value, and the company still is profitable and cash flow-positive. You could make the case that it’s a deep value here.

And the chart makes you wonder how sellers haven’t passed out with exhaustion yet. The company’s Relative Strength Index has been in the teens for nearly a month — and anything under 30 is considered technically oversold.

But none of that means TEVA stock can’t go lower.

A tax-free $2 billion asset sale allocated solely to debt would only reduce overall obligations by 5.7%. That’s a Band-Aid on a broken leg. Teva actually has to prove that the fundamental business is improving, and there simply are no signs of that happening.

Investors who want to speculate on a rebound driven by oversold technicals and fundamentals can do so, but this still is a high-risk (albeit high-reward) scenario.

Personally, I prefer to do my shopping in safer neighborhoods.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/battered-teva-pharmaceutical-industries-ltd-adr-stock-still-is-toxic/.

©2024 InvestorPlace Media, LLC